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A. Stotz All Weather Strategies – September 2023

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The All Weather Strategy is available in Thailand through FINNOMENA. If you’re interested in our allocation strategy, you can also join the Become a Better Investor Community. Please note that this post is not investment advice and should not be seen as recommendations. Also, remember that backtested or past performance is not a reliable indicator of future performance.

What happened in world markets in September 2023

Performance of the World stock markets

  • US saw among the largest drops in September 2023
  • Japan was one of few big markets that was up
  • Hong Kong and China A did poorly as well
  • Europe was down, but less than US and China

Find the updated Performance of the World stock markets here.

World stocks fell 4.1% in September

  • In 2022, World stocks were down 18.0%
  • YTD23, they’re up 10.5%
  • Rising oil prices led to concerns about stickier inflation and rates kept high for longer, which is negative for equity

Global bonds continued down in September 2023

Commodities continued up in September 2023

WTI oil closed September 2023 at US$92/bbl

  • Saudi Arabia and Russia continue at low output
  • Resilient demand and tighter supply kept the oil price up

Energy drove commodities

Gold lost 3.7% in September 2023

  • Gold closed the month at US$1,848/oz
  • Rising US Treasury yields pushed down the gold price

All currencies strengthened against gold in September 2023

  • All currencies have weakened relative to gold YTD, though
  • Typically, a stronger US$ means a lower gold price in US$ and vice versa

US CPI rose to 3.7% YoY in August from 3.2% in July, though core CPI fell

US gov’t spending continues

  • The budget deficit jumped 3x in 2020 (and was almost at the same level in 2021), then returned to “normal” in 2022
  • 2023 is now expected to be 2x “normal”

Long-term US Treasuries ETF reaches a new low

ECB hikes another 0.25%

China is no longer no.1 in US imports

Chinese real estate is the largest asset class in the world

  • Hence, problems there will have impact

Real GDP growth is back in Brazil

Key takeaways

  • US CPI rose to 3.7% YoY in August 2023 from 3.2% in July
  • US gov’t spending continues
  • Long-term US Treasuries ETF reaches a new low
  • ECB hikes another 0.25%
  • China is no longer no.1 in US imports
  • Chinese real estate is the largest asset class in the world
  • Real GDP growth is back in Brazil

Performance review: All Weather Inflation Guard

All Weather Inflation Guard was down 1.8%

Since inception, the strategy was down 0.3% but 7.9% above a 40/60 portfolio

  • The strategy has experienced less volatility though

In September 2023, the strategy was down 1.8%, which was 1.8% above the 40/60 portfolio

  • Money market and TIPS held up the best
  • The World equity fund we use in the strategy underperformed the MSCI AC World Index

Performance review: All Weather Strategy

All Weather Strategy was down 2.4%

Since inception, the strategy was up 24.3% and 11.7% above a 60/40 portfolio

In September 2023, the strategy was down 2.4%, which was 1.5% above the 60/40 portfolio

  • Our 25% Japan allocation did well
  • Our 25% Developed Europe held up OK among equities
  • Our 25% target allocation to US equity dragged on performance

Performance review: All Weather Alpha Focus

All Weather Alpha Focus was down 4.1%

Since inception, the strategy was down 13.7% and 1.7% above a 60/40 portfolio

And 0.7% above World equity

In September 2023, the strategy was down 4.1%, which was 0.2% below the 60/40 portfolio

  • The strategy was 0.3% above World Equity
  • Out of our bigger tilts, only bonds and gold did better than World equity

Global outlook that guides our asset allocation

Oil price has rebounded, which creates inflationary pressures

  • The volatility of energy prices is a reason that central banks look at core inflation measures excl. food and energy
  • Though, if the oil price continues up, it could reaccelerate inflation as it’s a key input for many industries

The 3m gov’t bond yield has risen to 5.2% from 3.4% a year ago

  • Central banks (CB) battle inflation while trying to avoid a severe recession or banking crisis
  • Rates have come up quickly, and inflation has come down, so we expect pauses or slower hikes from CBs

The market expects a continued pause in November 2023

  • The market is pricing in a 69% probability for a continued pause at the next FOMC meeting
  • A pause could mean a delay in the recession
  • A pause could also be positive for equity markets

US is now at peak employment

  • Lowest unemployment since 1969; peak employment precedes recession
  • Puts upward pressure on wages, which is inflationary
  • On the flip side, a strong labor market can keep the recession at bay

Valuations have risen, as price has rebounded YTD but still below +1 Stdev

  • World stocks’ valuation is above its long-term average
  • The consensus net margin has come down a bit, but analysts have revised it up recently

Strong US$ hurts Emerging markets

  • A strong US$ is negative for many Asian markets due to US$-denominated debt is getting harder to pay back
  • If the US$ starts to strengthen again, it would be negative for Emerging markets

China is in trouble

  • China continues with easier monetary and/or fiscal policy to stimulate the economy
  • It’s uncertain if the Chinese economy has bottomed yet
  • Even with a strong recovery, Chinese stocks could underperform due to geopolitical risk

Bonds are typically a safe place to be

  • In recessions, safer assets like government bonds typically have performed well
  • Though with high inflation, low yields could still lead to negative real returns
  • We generally don’t allocate to bonds to speculate on the upside but rather use it to protect capital over time

Oil price has strong technical support

  • Saudi Arabian and Russian cuts could keep supply tight
  • If demand is sustained, there could be further upside in the oil price

Oil price has driven commodities in 2H23

  • Commodities as a group don’t look as attractive as Energy/oil
  • The S&P GSCI index (shown in the chart) has a 61% weight to Energy, while many available commodities funds have <40% in energy

Food prices have softened

  • If the trend continues down, it would help to lower the pace of inflation
  • Adverse weather conditions could push up prices again

Commodities have rebounded due to oil, but too early to call the turn for the group

  • The global economic growth outlook remains uncertain
  • The main upside in commodities would come from a supply shock, adverse weather conditions, or significantly higher demand due to an improved growth outlook

Central banks have been loading up on gold, maybe switching from US$?

The recession risk remains

  • In general, gold protects value in times of uncertainty and market downturns

The technical support for gold isn’t bullish

  • While 200DMA is in uptrend, 50DMA has fallen
  • If 50DMA were to cut down through the 200DMA (looks like it’s about to happen), it would be a negative signal for gold

Risk: Inflation reaccelerates

  • Central banks’ aggressive rate hikes and QT crash the stock markets
  • Continued rate hikes globally could lower bond yields (as higher rates mean lower bond prices)
  • If inflation reaccelerates, we could miss out on rising commodities prices

DISCLAIMER: This content is for information purposes only. It is not intended to be investment advice. Readers should not consider statements made by the author(s) as formal recommendations and should consult their financial advisor before making any investment decisions. While the information provided is believed to be accurate, it may include errors or inaccuracies. The author(s) cannot be held liable for any actions taken as a result of reading this article.

Posted in All Weather Strategy