too much of a good thing
After a strong start to the month, stock markets gave back a good portion of their gains late in February, spooked by a sharp increase in rate hike expectations as hopes for economic growth continue to rise with the ongoing vaccine rollout.
With an ideal trading environment that led to profitable positions in both the early rally and late correction, Alpha Seeker (+6.3% Feb) had its best non-crisis month since 2013, continuing its strong start to the year at +8.1% YTD with just 0.12 daily correlation to the S&P 500. Taking a similar approach, Smart Index strategies (EAFE +2.8%, Emerging Markets +1.7%, Smart Tech +0.5%, US Equity +3.2%) all outperformed their benchmarks for a second consecutive month by increasing exposure during the early rally before turning more defensive during the correction.
That higher growth is taken as a negative for stock indexes is a testament to how far valuations of growth companies have been stretched by investors riding a 13-year wave of cheap money. This presents an interesting conundrum: if growth becomes too widespread, it no longer commands a premium and value can suddenly become attractive. This was clearly on display in February as growth had its worst month relative to value since 2000 (see chart below), dragging Hedged Disruptor (-2.2% Feb) to its first down month since before the election.
Investment themes will always come and go, each one a lesson on the value of flexibility over pursuit of “the answer”. Through the systematic flexibility of the Volatility Dashboard, this concept is woven into everything we do at TCM. Schedule a webinar today to see how we can help!