Multi-Strategy Model: August 2023 +0.1%, YTD +13.6%
August marked a volatile month after the US stock market ramped up almost 20% in the first 7 months of this year. The S&P 500 closed lower every week in the first 3 weeks of this month. At its worst point, it was down 4.7% before rebounding to end the month lower by 1.6%.
The difficulty this month was further magnified because there are hardly any safe havens to be found this month. We have witnessed this from time to time since 2022 when the Fed started its incessant rate hiking cycle to dampen inflation. While most market participants are convinced we are at or if not near the end of the cycle now, the question of how long we will stay at such rates remains elusive. After more than one and a half years, inflation still lingers, and what the Fed plans to do continues to cast a shadow over the financial markets.
But if you look at the data to date, you will understand why the Fed retains a hawkish tone in their communications. Despite China buckling under growth problems and Europe slowing, the US in contrast, is holding up exceptionally well. Business and retail spending is strong. Labor data is still robust although there are signs of tapering.
What probably prevents the Fed from pushing the rates further up is the progress on inflation. The US Core PCE inflation which the Fed watches finally came down to 4.2% after moving neither here nor there for the past 6 months. But it is still some way to their target of 2% which Jerome Powell has emphasized despite calls to revise this target upwards in light of changing norms.
Labor, wage growth, GDP, commodity prices, and market expectations would all have an impact on the Fed's decision. Unless these also show a sustained slowdown, particularly if inflation isn't budging much, if not, there is always the risk of inflation stalling or resurging. Thus until we see inflation dropping in a more sustainable manner or the economy slowing more, the Fed is unlikely to drop its tone and risk pumping up optimism which can in turn reignite inflation and hinder their efforts.
Despite the broad-based selloff across the markets this month, our model portfolio held up well. It was up slightly by about +0.1% against the backdrop of the S&P 500 falling -1.6%. The model's sector picks in Energy, Industrials, and Technology, while down overall for the month, still did relatively better than the broad market with Energy again being the only sector that bucks the trend. But the main driver that pushes our model portfolio into positive territory this month is our volatility trades. The model entered into short volatility positions as the selloff deepened in a timely move that caught volatility when it was high. The strategy made good profits as the market rebounded and volatility subsided.
Overall, the model portfolio is up +0.1% for the month bringing this year's return to +13.6% YTD.
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* This is the model performance of portfolios constructed using more advanced strategies than those taught in our courses. They can be implemented with the assistance of an iFAST Global Markets (Singapore) senior investment adviser. Note that live performance may vary due to execution price slippages, the difference in sizing precisions, etc. All performances are measured in USD terms.
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