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 targetedby the Federal Reserve anytime soon. The inputs that kept inflation so low for so long (cheap labor; cheapgoods; cheap energy as an input to manufacturing) have all changed. Additionally, MMT suggests thathigher interest rates can be stimulative, and we believe the current level of rates is having a positiveeffect 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, andglobal protectionism are all reasons why we view the current investing landscape is quite different thanthe past 2 decades.
• Portfolios should have exposure to real assets and other strategies that can perform in this type ofenvironment. A simple portfolio consisting of equities and bonds only will be suboptimal if our view iscorrect.
• The concentration of the largest names in the S&P 500 has never been greater. While today’s mega-capstocks continue to exhibit robust uptrends, the majority of the smaller constituents have not performedwell in 2024. This is worth watching, as if the market’s mega-darlings start to falter, the negative impacton the price of the S&P500 could be significant.
• 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 DTEoptions are now roughly 50% of daily option volume. Don’t underestimate the potential for a violentdownside repricing in equity indices if the volatility sellers are caught offsides.
We have expanded our systematic equity trend strategy to include a second model in the portfolio. Our originalmodel is a medium-term breakout momentum-based model that is catalyst driven. It is designed to participate inthe strongest stocks breaking out to new highs, and many of the signals are in names that are midcaps oremerging large caps. It is also designed to ruthlessly eliminate positions when these powerful thrusts higherwane. We have incorporated a second trend following model that is slightly longer term than the original model.Our second complimentary model remains true to the thesis in that it identifies the stocks with the strongestuptrends. Where it differs is that it incorporates strong sales growth and earnings growth as a component of thesignal, and that it also is a bit more patient in the determination of the end of an uptrend. It also has tended togenerate buy signals in slightly larger capitalization companies.
We believe the combination of the two distinct models generates an even more robust portfolio. Much like ouroriginal model, position sizes, entries and exits are all entirely systematically determined. What differs is the useof leverage. As our second model is a bit more patient in deciding that an uptrend has ended, we don’t allow it touse leverage when new signals are prevalent. Instead, the second model simply rotates out the weakest positionsand replaces them with stronger new positions.
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 systematic equity strategies are performing well, and both models generated strong returns in May. We continue to methodically dial up exposure to these strategies as they are performing as expected and the environment is very constructive for these strategies.
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. With equity indices at all time highs, and concentration in the largest names so heavy, and our tactical equity strategies performing so well, we prefer to wait for a significant pullback before adding any additional exposure.
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. We have noted that sponsors of multi-family deals are having a very difficult time raising equity capital. With that challenge, we are seeing an explosion of funds and offerings that focus on preferred equity positions. These positions yield anywhere from 12% to 17%, are higher in the capital structure which decreases the probability of loss, and some of them even come with modest upside on the property. We are in due diligence with a few offerings and expect to incorporate them into portfolios in the months ahead.
Trend Following and Inflation Benefitting Strategies:
Allocation: High end of the target range
Comment: Trend following strategies have generally performed very well in 2024, although they have given back some of their Q1 gains as energy prices and bond yields have potentially ended their upward trends. 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:
S&P 500 Market Cap vs. Equal Weighted. Diverging Significantly since May.
Negative Divergences:
Higher Rates are Stimulative:
U.S. Apartment Transactions Slump to Lowest Level Since Pandemic
Homeowners Insurance Continues to March Higher:
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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