Market Commentary:
Summary of our views is as follows:
∙ The price of money is a significant driver of asset prices and economic activity. This has been the largest, fastest increase in rates ever in the US. We believe the full impacts are not yet known and may not be for a while.
∙ While inflation is clearly declining, we doubt it will 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. What will the Fed’s response be if inflation only declines to perhaps 3% to 4%?
∙ The distribution of potential outcomes in public and private markets is wide, and much wider than it has been in decades. We caution using a lens from the 2000 – 2021 period as a mechanism to evaluate investments today.
∙ 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 markets with multiple large rallies and declines and steady erosion of purchasing power.
∙ The mark‐to‐market of private investments has the potential to be an additional drag. Many will show losses, which may result in less demand, and possibly a desire to pair back exposure. This brings elevated risk to public and private equities.
∙ The risk of a credit crunch in the second half of 2023 remains. Investors are no longer willing to accept zero interest from bank deposits and have been reallocating capital into money market funds or other short duration investments. Regional banks have historically been a major provider of CRE, C&I and personal loans. Regional bank business uncertainty could result in tighter lending standards or even an unwillingness to extend credit.
∙ Demand for downside protection in the US equity markets remains anemic. Put option skew remains low, while market liquidity has been on a general downtrend. Don’t underestimate the potential for either a grind lower or a gap lower in equity indices in the second half of 2023.
The S&P 500 is overbought here.
Our favorite proprietary oscillator has been grinding higher and officially entered overbought on June 13th. Relative strength indices for the S&P 500 and QQQ crossed 70, again overbought. The S&P 500 is 4% above the 20 day simple moving average, a level not often reached. The percentage of S&P 500 stocks above the 20 day simple moving average is approaching 90%, again an extreme.
Option skew tells a similar story. Demand for call options appears elevated vs. demand for put options in many single name equities. Zero day and 1 day to expiration options have become a dominating flow, particularly on the call side. Absence of fear reigns.
As Paul Tudor Jones is famous for saying, “price moves first, and narratives come later on.” The talking heads have pointed to short covering, hedge funds being forced to buy into the rally for fear of falling too far behind the indices, retail investors taking some of the money they had parked in higher yielding money markets and redeploying it into stocks. The rationale isn’t important to us. How we are taking advantage of the opportunity is.
We continue to methodically trim passive long equity positions, but that doesn’t mean our overall equity exposure is necessarily declining. Our tactical equity strategies have been ramping up exposure since the last few days of April 2023, so we have been getting longer equities over the past month.
We rather like this shift of risk out of passive equity longs and into tactical equity strategies, as if this aggressive move higher in stocks is followed by an aggressive reversal, we expect the trailing stops and systematic risk reallocations in our tactical strategies to lock in a healthy portion of the recent gains and decrease risk. This also provides us an opportunity to redeploy dry powder in our passive equity bucket if any pullback becomes significant.
From a macro perspective, we maintain the view that the economy is in the midst of a slowdown of unknown depth, but more importantly many companies are in the midst of a decline in earnings. Whether the economy ends up officially in a recession or not isn’t that important to us. How deep and wide of an earnings recession, and for how long the Fed keeps rates high or raises them further, is much more important.
We would be remiss if we didn’t mention the lack of breadth in the equity markets here. Anyone following the markets is keenly aware that perhaps 7 to 10 stocks are responsible for the preponderance of the S&P 500 YTD gains. While we certainly don’t think this is a positive, we also recognize that there have been plenty of times where a market rally began with narrow breath, which subsequently widened out. While June month to date is clearly a small sample set, the equal weighted S&P 500 is starting to participate in the rally, after lagging significantly through May.
Source: TradingView
Monthly Podcast Recommendation:
RCM Alternatives: The Current State of Commercial Real Estate: Armageddon or Overblown? https://www.rcmalternatives.com/2023/06/the‐current‐state‐of‐commercial‐real‐estate‐armageddon‐or‐ overblown‐setting‐things‐straight‐with‐matt‐lasky‐of‐equity‐velocity‐funds/
Matt is a Sundial favorite and he clearly distills down the challenges and the opportunities in CRE in this podcast. Well worth the listen.
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 tactical equity strategies have continued to increase exposure over the past month. We remain steadfast in our belief that this is an environment for individual stock picking, and not simply investing in equity indices.
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 see little reason to tinker with the positions until the macro and central bank outlook is more clear. On any significant pullback we would expect to add to existing positions.
Yield Generating Strategies:
Allocation: High end of the target range.
Comment: A full allocation reflects both our defensive stance and the attractive opportunity set. There are so many strategies that can generate a high single digit and even mid double digit annual return with very modest risk. We continue to utilize mostly alternative yield generating investments and our Government and corporate bond exposures are limited to short maturities where yields of around 5% are quite attractive. We also recently due diligenced a new offering from one of our existing managers, who offered Sundial an opportunity to participate in the external launch of what has been an internal only fund for the past few years. It is a limited capacity strategy, with healthy double digit annual returns, and no correlation to equity markets. This is one of the advantages we have in being a boutique multi‐family office opposed to being a large asset gatherer. We continue to believe these sort of niche strategies are far superior to the many unlimited capacity, more generic strategies offered “as alternatives” from many of the larger firms.
Trend Following and Inflation Benefitting Strategies:
Allocation: High end of the target range
Comment: Our trend following focused investments have been performing quite well over the past month, and the March 2023 drawdown is becoming a distant memory. We believe the uncertain macro environment continues to be constructive for “dislocation seeking” trend following strategies. Now more than ever, we embrace this uncorrelated stream of returns, particularly as these strategies could capture some very painful trends of lower stocks, higher or lower rates, and increased implied and realized volatility if we do go into a recession and/or a sustained credit crunch.
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 real and increasing in our opinion, and we are strong proponents of this exposure in all portfolios.
CHARTS & TABLES:
Source: https://twitter.com/GameofTrades_/status/1663530714048995331?s=20
Source: https://twitter.com/GameofTrades_/status/1659914372586647553?t=ZgacaQzSkTJ_p‐lVeYKPYQ&s=09
Small business CapEx expectations are crashing. – Jesse Felder
Source: https://twitter.com/jessefelder/status/1656312349362638849?t=DexA‐xQfZf8Sol_GlSHEAg&s=09
Source: LongConvexity on Twitter: "https://t.co/K8JkPB08Do https://t.co/AIYl9CC3px" / Twitter
Do not think for a second that this WH is above suppressing the price of oil for political purposes right into 2024 elections. Fully expecting a ZERO SPR for Nov 2024. – Michael Taylor
Source: https://twitter.com/Mike_Taylor1972/status/1667289778335936512?t=iVxbC3Gd4‐njwW5G6cgnew&s=09
Source: https://twitter.com/AyeshaTariq/status/1662059541746335745?t=8qr2b00bwqclnS1TRw‐ltw&s=09
Source: https://twitter.com/MikeZaccardi/status/1656040666848215045?t=u4vr80BE7sF136iCRNYZEw&s=09
Record Call Option Volume on June 15th, 2023.
Source: SpotGamma
Source: SpotGamma
Source: FS Investments
Source: FS Investments
Source: FS Investments
Look at how broken things have become in US housing. The typical person who is buying one of the few houses that are on the market is taking on a $2,555 mortgage payment. That is double the mortgage of the people who bought in January and February 2020. – Jeff Weniger
Source: https://twitter.com/JeffWeniger/status/1656777702131609600?s=20
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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