MARKET COMMENTARY:
Summary of our views is as follows:
• We continue to believe that the US inflation rate won’t be able to return to the very low levels targeted by the Federal Reserve anytime soon. The inputs that kept inflation so low for so long (cheap labor; cheap goods; cheap energy as an input to manufacturing) have all changed. Additionally, MMT suggests that higher interest rates can be stimulative, and we believe the current level of rates is having a positive effect on wealthy consumer spending.
• We caution using a lens from the 2000 – 2021 period as a mechanism to evaluate investments today. The potential for persistently higher price of money, the desire to shrink the Federal balance sheet, and global protectionism are all reasons why we view the current investing landscape is quite different than the past 2 decades.
• From 1968-82 the equity market experienced multiple violent rallies and subsequent selloffs, and 70% of purchasing power was lost to inflation. We could see a mini period that is similar -> choppy equity and bond markets with multiple large rallies and declines and an erosion of purchasing power from elevated inflation. Portfolios should have exposure to real assets and other strategies that can perform in this type of environment. A simple portfolio consisting of equities and bonds only will be suboptimal if our view is correct.
• Demand for downside protection in the US equity markets remains anemic. Put option skew remains low, and strategies that sell volatility are in high demand, and the demand is increasing. Additionally, 0 DTE options are now roughly 50% of daily option volume. Don’t underestimate the potential for a violent downside repricing in equity indices if the volatility sellers are caught offsides.
We continue to position portfolios for elevated inflation and modest economic growth with risks to inflation moving higher and growth moving lower as 2024 progresses. Sundial relies heavily on our quantitative tools to guide portfolio management. On a daily basis we run our market conditions model and also “measure and map” short term and medium term trends on various assets, along with their expected daily ranges to help guide our entries and exits.
US equities are at an interesting inflection point, as our trend models show that various equity indices are testing their short and intermediate term trend lines for the first time since October 2023. It is too early to have any confidence that the strong upward trend in US stocks has broken, but we are watching closely.
Our Sundial equity market conditions model looks to quantify the relative ”health” of the market based on a variety of inputs that we deem important. Advances, declines, net highs, McClellan indices, and aggregate gamma exposure are some of the inputs. Our market conditions model was very constructive from the beginning of November 2023 through April 4th, and then it transitioned to a defensive posture. On April 23rd it again started to get more constructive but is by no means as bullish as it was from November through April.
Market gamma has been negative since April 4th, which simply means to us that market moves in either direction are propelled by dealer hedging flows. In negative gamma, dealers theoretically are buying into rallies and selling into selloffs as they adjust option position hedges, which leads to more volatile conditions. Until gamma turns decisively positive again, we expect whippy intraday price action.
Despite the recent weakness along with larger daily moves, implied volatility continues to be very muted. Even in the weakness in April, the VIX only briefly reached a level of 21 before collapsing. Being short volatility continues to be a well subscribed position whether outright or in various structures offered by many institutions.
Sundial Trend Snapshot:
STRATEGY COMMENTARY:
As a reminder, our Sundial Dynamic All-Weather Portfolios attempt to achieve positive returns regardless of the macroeconomic regime, such as positive or negative growth, or an inflationary or deflationary environment.
This is achieved through a few key principles:
• Utilize multiple asset classes and strategies, beyond traditional equity and fixed income markets
• Utilize both active (tactical) and passive (buy and hold) strategies
• Recognize that some investments are stability seeking (short volatility bias) and others are instability or dislocation seeking (long volatility bias) and it is critical that a portfolio contains both.
The desired result is a portfolio of non-correlated revenue streams, that exhibits attractive asymmetry through tactical allocations and return stacking, truncates the downside in adverse markets, and is fully offensive in constructive markets.
Tactical Equity Strategies:
Allocation: High end of the target range
Comment: Our momentum focused tactical strategies generated double digit profits in the January through March 2024 period, before giving some of it back in April. We are working diligently on expanding our offering from our existing shorter term systematic strategies to a blend of short and longer term systematic strategies. The focus to expand these programs is related to our continued research seeking to achieve far superior performance and risk-reward vs. the S&P 500 which many investors use as a benchmark.
Passive Equity Strategies:
Allocation: Low end of the target range
Comment: Our passive equity longs remain at the low end of our targeted range. These positions are mostly in ETFs and other diversified exposures. We have not tinkered with exposures much in all in the past 2 years. We are inclined to add to these positions on significant dips as long as our macro outlook doesn’t deteriorate.
Yield Generating Strategies:
Allocation: High end of the target range.
Comment: A full allocation reflects the attractive opportunity set. There are so many strategies that can generate a high single digit and even mid to high double digit annual returns with modest risk. We continue to utilize mostly alternative yield generating investments that focus on private credit, bridge lending, commercial real estate deals, and tranched insurance risk related strategies. We expect the returns in these strategies to remain in the double digits for the foreseeable future.
Specifically related to commercial real estate, our highest focus is industrial properties. Both flex industrial and specialty properties such as luxury garages are where we believe the best risk reward is right now. We have not participated in a self-storage deal in almost a year now, as storage facility prices appear expensive to us. We have started to look at multi-family properties again but fear it is still too early for any value-add deals as prices haven’t adjusted down enough to reflect the increased difficulty to push rents up, along with the skyrocketing insurance premiums and higher interest rates.
Trend Following and Inflation Benefitting Strategies:
Allocation: High end of the target range
Comment: Trend following strategies have generally performed very well in 2024 as commodity prices and interest rates have been trending higher. We continue to believe the uncertain macro environment is constructive for “dislocation seeking” trend following strategies. We were never believers in the stock and bond only portfolio, and we continue to hold the view that owning government bonds will not act as much of a portfolio hedge as long as inflation remains above target. Trend following strategies are a far better portfolio diversifier.
Long Volatility / Long Convexity Strategies:
Allocation: High end of the range
Comment: We continue to maintain maximum exposure to these strategies, and when we take on a new portfolio, this is also one of the first positions we initiate. The cost of tail protection (skew) remains extremely low, the potential for a left fat tail is elevated in our opinion, and we are strong proponents of this exposure in all portfolios.
CHARTS & TABLES:
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Public Sector Deficit = Private Sector Savings, to the penny. Lots of interest income if this happens….
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Disclaimers
This commentary does not constitute an offer to sell any securities or the solicitation of an offer to purchase any securities nor does it constitute tax advice. This information is for informational purposes only and is confidential and may not be reproduced or transferred without the written consent of Sundial. Past performance is not indicative of future results. Statements and opinions in this publication are based on sources of information believed to be accurate and reliable, but we make no representations or guarantees as to the accuracy or completeness thereof. These materials are subject to a more complete description and do not contain all of the information necessary to make any investment decision, including, but not limited to, the risks, fees, and investment strategies of an investment.
This correspondence may include forward-looking statements. Forward-looking statements are necessarily based upon speculation, expectations, estimates and assumptions that are inherently unreliable and subject to significant business, economic and competitive uncertainties, and contingencies. Forward-looking statements are not a promise or guarantee of future events.
Benchmarks and indices are presented herein for illustrative and comparative purposes only. Such benchmarks and indices are not available for direct investment, may be unmanaged, assume reinvestment of income, do not reflect the impact of any trading commissions and costs, management or performance fees, and have limitations when used for comparison or other purposes because they, among other things, may have different strategies, volatility, credit, or other material characteristics (such as limitations on the number and types of securities or instruments) than the Firm. It should not be assumed that your account performance or the volatility of any securities held in your account will correspond directly to any comparative benchmark index. We make no representations that any benchmark or index is an appropriate measure for comparison. The S&P 500® Index is a stock market index from S&P Dow Jones Indices. It is a market capitalization weighted index of 500 of the largest U.S. companies, designed to measure broad U.S. equity performance.
Asset allocation and diversification will not necessarily improve an investor’s returns and cannot eliminate the risk of investment losses. There are no assurances that an investor’s return will match or exceed any specific benchmark.
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