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Dear Investors,
In our ever-changing financial landscape, we find ourselves in a particularly unique moment with numerous factors signaling possible market turbulence. In this newsletter, I aim to share vital insights, data points, and suggested strategies for navigating the US market, along with updates on our current portfolio positioning.
US Situation Overview:
- The yield curve appears to be re-inverting more deeply, possibly due to expectations of a Fed hike in May (25bp). This highlights the potential repercussions of over-tightening at this stage in the economic cycle.
- As public spending reaches its statutory debt limit, equity markets may soon face the full force of a deeply divided Congress. A contentious debate is likely before lawmakers ultimately agree on a resolution.
- Bankruptcies have hit a 13-year high, and loan data shows its largest fortnightly decline in history. A Dallas Federal Reserve survey of 71 banks revealed a significant drop in loans for the week ending in March.
- The Fed Funds curve is the most inverted it has been since 2007, and the entire treasury curve lies below the Fed Funds rate.
- US-based employers announced 89.7k job cuts last month, a staggering 319% increase from 21.387k the year before.
- Money supply has turned negative year-over-year, while deposit growth has experienced its largest annualized contraction in modern US history.
The Fed now finds itself in a precarious position: either risk crashing the economy or tolerate higher perceived inflation. This dilemma generates uncertainty surrounding the future direction of monetary policy. Regrettably, the long lags associated with employment and inflation data have been largely overlooked.
Our present portfolio positioning allocates 41.6% to corporate bonds, with 28.7% of those in USD. We anticipate the Fed to “pivot” sooner than the ECB, so we have fully hedged the currency position. As a result, our bonds stand to benefit from both an expected rate cut in the US and a weakening dollar.
Our portfolio’s equity exposure sits at 12.5%, and we have implemented a hedge to mitigate risk in the current climate. The rest is invested in short term bonds for avoiding any risk of linked to the banking sector.
We plan to reestablish our long equity volatility position (VIX futures) if and when the VIX curve flattens. This is due to US equities rallying in spite of an inverted US yield curve, which suggests growing drawdown risks.
In light of the existing financial conditions, vigilance and preparedness are essential in anticipating market fluctuations. The interconnected nature of financial systems makes predicting the ultimate outcome a challenge, but rest assured that we are closely monitoring the situation and will provide updates as needed.
Best regards,
Federico Polese