Oct 6, 2023
TLDR: Equity markets fell across the board again in September, but all of our active equity strategies outperformed their benchmarks thanks to a combination of:
(1) Significant upside from our energy stocks and
(2) Protection from our strategic cash holdings which buffered us from the full impact of the market’s pullback.
Here’s some quick context on what happened and why, what we did about it, and our outlook ahead:
The S&P 500 and Nasdaq suffered their second straight monthly declines, with September marking their worst month of the year (-4.87% and -5.81%, respectively). Major factors driving the market down included the surge in oil prices (thanks to Saudi Arabia and Russia cutting production) and the jump in bond yields (thanks to economic growth remaining strong even as inflation slows, causing many to rethink their views that a near-term recession would eventually lead to interest rate cuts).
We’ve been in the “higher for longer” interest rates camp for a while now. I mentioned in my August recap: “This means we’ve been expecting higher bond yields than the market… so when they arrived, we were prepared with strategic cash holdings to buffer against losses.” This story was much the same in September.
The broadest move we made in September was our decision to trim our energy holdings almost across the board. We believe the recent rally in crude oil prices (along with other commodities we have exposure to, such as uranium, coal, and natural gas) may be a bit overextended in the short term. Our long-term thesis remains fully intact, but we elected to pare back positions a bit to crystallize gains and manage risk for clients.
To recap our trades during the month: in Flagship, we bought Nvidia and trimmed Adobe after strong YTD gains. In Opportunities and Offshore, we trimmed many of our energy stocks after a dramatic move higher. We also added to a few semiconductor stocks in Offshore and trimmed our position in luxury goods maker LVMH.
No change to our views since last month. We remain cautiously optimistic with roughly ~70-85% net exposure across our active equity strategies. This strategic cash functions as “dry powder” to capitalize on continued volatility.
Our analysts pitched 3 new stocks at our Investment Committee during September but we are waiting for a few fundamental and technical indicators to firm up before buying. In case you missed it, here’s our latest Investment Committee Vol. 2 where I discuss the state of the US consumer and how we’re positioned within the sector.
Q3 earnings season will kick off in earnest in mid-October. Our analysts will be busy prepping their quarterly previews of anticipated results and the game plan for each stock, which may dictate trades we make throughout October and November as opportunities arise.
Also, as you’ll see in the chart above, short-term U.S. Treasuries were one of the best performing assets in Q3 and we believe this has runway to continue for the foreseeable future. Simply put, a “T-Bill and Chill” strategy continues to be attractive with short-term yields at 5%+. Smart Cash is yielding up to 5.33%* and serves as an excellent place for your rainy day fund. We encourage you to check it out here if you haven’t already.
If you have any questions for me or the team, just reply to this email and we’ll get back to you as soon as we can.
Co-CEO and Chief Investment Officer
*Yield is as of 9/28/23. This represents the highest 7-Day Yield currently available among our options. Certain funds have specific investment minimums, which can be up to $3,000. Investors who invest amounts below these minimums may experience lower yields than those advertised. Yields will fluctuate over time, and are not a forecast or guarantee of future earnings.
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