may flowers
S&P 500 TR Index, Apr - May 2024. Source: barchart.com. Click for larger image
Encouraged by a dovish FOMC meeting and mixed economic data that supported the case for future accommodation, the Nasdaq 100 (+6.3% May) and S&P 500 indexes (+5.0% May) erased April’s correction with strong rallies to new all time highs in May while small caps (Russell 2000 +5.0% May) and international stocks (MSCI EAFE +3.9% May) also rose.
After jettisoning hedges on Dashboard signals early in the month, TCM’s tactical risk management approach was able to capture most of May’s index gains with Tactical Beta (+4.4% May) outpacing continuously-hedged peers JP Morgan Hedged Equity (JHEQX, +3.8% May), Swan Defined Risk (SDRIX, +3.0% May) and Gateway Fund Cl A (GATEX, +3.2% May) during the month and extending its lead on each strategy over most rolling periods since inception (chart).
Return Comparison as of May 2024. Source: TCM, barchart.com. Click for larger image
While markets cheered a slight decrease in the pace of the Fed’s balance sheet runoff, tepid earnings reports from companies selling discretionary items to consumers (fast food, retailers and hotels) are increasingly hinting at a growth issue that may require a swifter response. Judging by history, this response will only come after the issue is apparent in lagging economic data and rate cuts are of little immediate use. Notably, another strong earnings report from “AI” giant Nvidia Inc (NVDA) actually marked the top for markets in May, suggesting that this growth miracle may be fully discounted by markets.
For now, low VIX and tight credit spreads reflect little worry of imminent systemic stress and under such conditions, we view hedge expense as the main risk to manage with market decline risk taking precedence only once conditions turn enough to make an imminent crisis more likely. While VIX levels are only a rough proxy for actual Dashboard signals, this concept is supported by the history of S&P 500 behavior under different VIX Index environments since its introduction in 1990 (chart).
S&P 500 Index with VIX levels, Jan 1990 - May 2024. Source: TCM, barchart.com
Since equity indexes exhibit a strong tendency to rise over time, an investor’s first objective should be to avoid anything that interferes with the process of compounding. This requires not just an effective hedge against market declines, but a cost-effective one. In fact, we have found that outside of crisis periods, the expense of hedging actually poses a greater risk to investors than market declines and while easier said than done, the best portfolio outcomes come from the right balance of risk management cost and effectiveness.