don’t look down
YTD return as of 3/31/24. Source: Barchart.com. Click for larger image
Capping a strong quarter dominated by the “AI” ecosystem (chart), equity markets shrugged off stalling progress on inflation with another low-volatility gain in March that kept TCM hedging expense near zero. Gains on the month were widespread as the small cap Russell 2000 (+3.6% Mar) played catch up with its larger peers (S&P 500 +3.2%, MSCI EAFE +3.2%, Nasdaq 100 +1.9% Mar) while emerging markets showed some signs of life (MSCI Emg Mkts +1.9% Mar) with a rally back to positive on the year.
Despite messaging that moved expectations for rate cuts further out in time and perhaps beyond 2024, even the month’s relatively hawkish FOMC meeting was taken in stride by markets, suggesting increasing reliance on actual economic outcomes rather than monetary stimulus for future gains. With the now record duration of the Treasury yield curve inversion continuing to imply recession, the stage could be set for turbulence as this concept is tested in the coming months.
Cumulative return, Nov 2023 - Mar 2024. Source: TCM, Yahoo Finance. Click for larger image
Driven by the secular growth of Artificial Intelligence spending and broadening adoption of cryptocurrencies, TCM’s Hedged Disruptor (+24.9% YTD) strategy extended its strong run over the past year while another solid month from Tactical Beta (+9.7% YTD) further widened its recent gap with continuously-hedged peers such as JP Morgan Hedged Equity (JHEQX) as dashboard signals have supported nearly 100% capture of the rally since November (chart).
As always, the best risk management outcomes for TCM’s indexing strategies are expected during crisis conditions defined by an inversion in the VIX futures curve followed by a sustained move to distressed levels in the VIX (see diagram below). Though rare, such conditions are an unfortunate reality of the Equity Crisis Cycle in which monetary policy is both the enabler of and catalyst for periodic systemic failures. In our experience, it is only during these intense periods that hedging has a positive expectancy and at all other times, cost should be paramount.
Until interest rates and the Treasury yield curve normalize, we view the current cycle as incomplete. Despite appearances to the contrary, the necessary ingredients for the next crisis remain in place and we will continue to monitor the VIX for signs that it is imminent.
