“Inflation, like lasagna, takes a long time to cook and a long time to eat.”

— Alex Berenson

The Rates They Are A-Changing

With inflation on the rise, Equity markets were rocked in January by a sharp adjustment in the bond market with US Treasuries suffering one of their worst months in decades. The explosion higher in rates weighed most heavily on high-multiple tech names that dominate the Nasdaq 100 index (-8.52% Jan) and also make up a large part of the S&P 500 (-5.17% Jan).

Reflecting the chronic nature of inflation and interest rates, much of January’s rise in VIX futures was spread evenly across the term structure, keeping acute crisis signals from firing until the equity decline worsened in the back half of the month. VIX hedges were accordingly deployed in TCM strategies beginning on Jan 14, resulting in 1.5% outperformance by 1/27 for risk-managed indexing strategies (see chart below) before a a furious 2-day equity rally closed the gap by the end of the month.

*VIX hedges kept Tactical Beta’s max drawdown near historical averages in January*

Benefitting from its nimbleness during January’s wide range, Alpha Seeker (+2.1% Jan) had its best month since August and at the market’s low on 1/27 was ahead of both the S&P and Nasdaq indexes over the previous 6 months. With equities on their heels, the benefit of low correlation often becomes clearer.

Overall, January has many parallels with October 2018, the last Treasury-led correction for equities that produced similar results in stocks and the VIX. In retrospect, that experience was just the warning shot before clearer alarm bells in VIX and substantial hedging gains during the plunge in December that year. With the Fed widely expected to begin hiking rates in March, the stage may be set for more turbulence in 2022.