stiff upper lip

*Jan 2025 MTD Returns. Source:* *barchart.com. Click for larger image*

Markets got off to a resilient start in 2025 with a broad rally in January (MSCI EAFE +4.8%, S&P 500 +2.7%, Nasdaq 100 +2.2%) despite challenges on several fronts including the transition to a new US presidential administration, China’s revolutionary “Deepseek” AI platform, a pause in the Fed’s rate-cutting campaign and the threat of new US tariffs. While their ultimate impact is presently hard to quantify, these challenges in the key areas of US economic policy and the outlook for US AI companies represent significant new uncertainty for markets to digest, a process that could well mean range-bound markets for the time being.

*Cumulative point gain / loss by VIX curve state (2nd VIX future / 1st VIX future), Jan 2005 - Jan 2025. Source: TCM,* *barchart.com. Click for larger image*

In such situations, we have found that the best approach is to avoid over-hedging by accepting normal volatility while staying vigilant for signs of contagion that can lead to a market crisis. For TCM, this means monitoring for VIX futures curve inversion that has historically accompanied the worst outcomes for the S&P 500 index. In fact, over the past 20 years the S&P 500 has lost a cumulative -6,242 points on days when the VIX futures curve was inverted versus a cumulative gain of +11,070 points when the VIX futures curve is upward sloping (chart).

Clearly, the opinion of the VIX marketplace has proven to be quite relevant for stocks and this is why despite inevitable negative headlines and volatile days, TCM’s approach is to reserve hedges mainly for when the VIX futures curve is inverted. While it comes with unique tradeoffs, we believe this strategy offers the best balance of risk control and total return of any hedged equity offering on the market today and entering its ninth year, Tactical Beta’s results since inception (chart below) are a testament to TCM’s foundational philosophy of aligning with the market’s long term odds through continuous assessment of present conditions.