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Encouraged by a dovish FOMC meeting that lowered the “dot plot” expectations for next year’s interest rates, 2023’s Fed pivot rally powered on in December with stocks (Russell 2000 +12.2%, Nasdaq 100 +5.5%, S&P 500 +4.5%) and bonds (Aggregate Bonds +3.3%) both soaring into the end of the year. With stocks full steam ahead and rates markets now expecting more cuts in 2024 than the Fed itself has suggested, the road ahead is becoming quite narrow for markets and more than ever, its ultimate destination will depend on the circumstances surrounding the much-anticipated pivot (see “A Fork Ahead” in our 2023 Year In Review).
In addition to reducing exposure with hedges, truly tactical strategies also seek to add value through appropriate exposure increases and while the difference may seem slight at first, it can become striking when the market winds shift. For example, during the sharp rally in the final two months of 2023, exposure adjustments in Tactical Beta (+4.8% Dec) created significant outperformance relative to strategies such as JP Morgan Hedged Equity (chart) that must carry continuous option hedges.
Cumulative Return, Nov-Dec 2023. Source: TCM, Yahoo Finance
Thanks to this flexibility, Tactical Beta once again outperformed its hedged equity peers* on an annual basis in 2023 as the previously ideal conditions for those strategies have given way to a new environment that changes the profile of options protection and caps upside more tightly for the “collar” strategies popularized by funds like Innovator ETFs and JP Morgan Hedged Equity. While there will never be a perfect investment, we continue to believe that the best odds for long-term alpha come from dynamic rather than static approaches.
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*Equally-weighted composite of JP Morgan Hedged Equity (JHEQX), Swan Defined Risk (SDRIX) and Gateway Fund A (GATEX), rebalanced monthly.