Correction or Continuation?
The past week has been dominated by a huge uptick in volatility. With most of those days having been to the downside, there’s much talk as to whether this is the beginning of a more meaningful correction. With that said, given the fact that the market is severely oversold, we would expect a bounce to the upside in the short-term. After that, all bets are off. The talking heads will tell you that rising rates are the cause for the pullback, and while that certainly might be the case, it really doesn’t matter. Yes, the economy is still strong, and one could argue that this is simply a healthy correction - but people said the same thing in 2007. The bottom line, price action is the most important indicator of all.
For the month just ended, we saw a decrease in volatility as the markets seemed to settle into a sense of complacency. Even a Fed rate increase late in the month didn’t have much of an effect. Many market watchers like to point out that excessive complacency can be the sign of a market top, though it can also be argued that sentiment indicators often can point to “market tops” for extended periods of time before they are actually realized.
The major indexes were a mixed bag as the Dow led the month with a return of 2.0%, the S&P 500 followed with a 0.6% return, and the Nasdaq was down 0.7%. Internationally, the EAFE gained 0.9% while the MSCI Emerging Markets Index lost 0.5%. This dispersion in returns affected many of our Sector Rotation and Asset Allocation strategies which were overweighed in Nasdaq-related positions.
Fixed income had a challenging month also marked by variance in returns. The Barclays Aggregate Bond Index declined by 0.6% for the month, while Municipal bonds (MUB) fell 0.7%. These lackluster results were driven by rising rates, which were driven up by signs of inflation and a Fed rate hike. High-yield bonds had a stronger month returning 0.6%.
Q3 performance for September, being a rather lackluster month for both stocks and bonds, tended to be varied as all of our styles were represented in the top performers. Two of our tactical strategies led the way as they both picked off opportune days to be invested. Note also, that both can use leverage when invested. Sector rotation continued to excel with Technology and Healthcare continuing their march upwards. Adaptive High Yield managed a small gain for the month, though in the last week it has moved out of High Yield and into money markets.
Q3 Strategy Focus
Active Index Rotation – Playing the Field
Active Index Rotation (AIR) is our newest tactical strategy. AIR went live in July and has experienced impressive returns through September. Being invested less than 50% of the time, enables AIR to sit on the sidelines and wait for specific market setups to occur before venturing in. In the last month AIR has profited from trades in Nasdaq, Small Caps, and High Yield index funds. Since AIR evaluates six different equity indexes and high yield, it is able to jump around and increase the odds of finding favorable market conditions. The trades thus far have only averaged a few days in length as expected by our research.
AIR should be considered an aggressive strategy when used as a standalone, but due to its low correlation with many other Q3 strategies, when used in blends it can actually help to temper a portfolio’s overall risk. Currently we are offering AIR at TCA, Jefferson National, Schwab and TD Ameritrade.
|Guiding Your Clients|
Given the recent volatility in the market, we understand you are probably getting more calls from concerned clients asking about the status of their investments. Please feel free to reach out to us if you should have any questions about specific accounts or the performance of our strategies. We can help put the recent market action in context. Note that many factors still point to a bullish environment for the economy.
- Corporate earnings – The majority of stocks are still outpacing analysts estimates, and the market, as a whole, experienced record profits in the most recent quarter
- Economic environment – Though low unemployment and rising wages have been linked to inflation, ultimately these indicators form the basis of a stable economy
- Technical trends – As of this writing, all of the major US equity indexes are trading above their 200-day moving average, an indicator widely watched in the market.
All the best,
Bruce Greig, CFA, CAIA
As always, if there’s anything we can do for you don’t hesitate to call.
Advisor Use Only. The Advisor Insight Newsletter may provide general investment information from sources deemed reliable but is in no way a solicitation to buy or sell any security. Past performance is not indicative of future results. Data is provided for informational purposes only and should not be construed as investment or tax advice. Performance data is based on monthly balances and reflective of model accounts held at Trust Company of America. Performance on other platforms may vary based on a number of factors including available fund universe and trade cut off times. Any “gross of fees” performance data is for Investment Adviser Representative use only and cannot be used with investors. In such a case, performance does not reflect the deduction of advisory fees and a client’s return will be reduced by the advisory fee and any other expenses incurred on the account. “Gross of fees” performance does not reflect the impact that fees have on the compounding effect of returns. Details on Q3’s fees are outlined in our ADV Part 2 brochure, which is available upon request. There is no assurance that objectives will be realized. There is risk of loss with all of Q3 Asset Management's investment strategies. Any reference to or use of the term 'registered investment advisor' does not imply that Q3 Asset Management or any person associated with Q3 Asset Management has achieved a certain level of skill or training. For additional information please see Q3 Asset Management Corporation's ADV, which is available upon request.