ResearchThe October Effect

The October Effect

Nov 7, 2023

TLDR: Equity markets were down for the third month in a row but there may be reason to be optimistic as we head into year-end.

The October Effect describes a perceived market anomaly that the month of October brings financial declines and market crashes. This October was no different, as equity markets for the third month in a row fell across the board. Our actively managed strategies performed about in line with their benchmarks driven by:

  1. Net positive impact from individual stock selection in our Opportunities and Offshore strategies

  2. Reasonable levels of strategic cash that insulated clients from the market’s volatility.

Here’s some quick context on what happened and why, what we did about it, and our outlook ahead:

1/ What Happened and Why

The S&P 500 and Nasdaq suffered their third straight monthly declines, as both indexes were down 2.2% and 2.8%, respectively. The indexes finished the month around where they were trading in May of 2023 so we’ve essentially round tripped the summer rally.

October saw a flurry of data signaling the resilience of the US economy, including a blockbuster jobs report, strong retail sales data and a blowout GDP print of 4.9% annualized for the third quarter. Ironically, the strong economic data was bad for markets as a resilient economy suggests that the Fed may have to hold interest rates at current levels longer than investors were expecting (something we talked about at length in our recent Investment Committee). 

Q3 earnings were in full swing during the month as ~56% of the S&P 500 reported results as of this writing. The preliminary data can be characterized as a “mixed bag.” Companies were rewarded for prioritizing profitable growth while others were penalized for missing expectations. Beta, or market exposure, is often sufficient when a rising tide lifts all boats (in a zero interest rate environment, for example). However, in the more tenuous market landscape we’re now seeing, alpha - or uncorrelated outperformance from active management - is increasingly important.

2/ What We Did About It

We sat tight in October as the data rolled in. We were busy prepping our quarterly earnings previews, revising our estimates, and discussing internal recommendations on any action items that might be required moving forward. Most of the time ‘no action’ can be considered an action, but you should expect us to make some updates around the edges following the recent reports.

3/ The Path Forward

  • We remain cautiously optimistic with roughly ~70-85% net exposure across our active equity strategies. This strategic cash functions as “dry powder” to enable us to capitalize on opportunities as they present themselves and has meaningfully helped us over the last 3 months.

  • Although October was a tough month for markets, we believe there may be a positive set up for stocks and bonds heading into year-end. The U.S. Treasury appears to be leaning more dovish and Fed Chairman Jerome Powell has essentially confirmed the “higher for longer” interest rate environment that lies ahead. With recessionary fears being pushed back by a year or so, we believe that there could be some upside as we finish out 2023.

As an aside, Treasuries continue to yield their highest rates in decades and the “T-Bill and Chill” strategy we referenced last month continues to be attractive. Smart Cash is currently yielding up to 5.36%* and serves as an excellent place to earn extra yield on your cash. 

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.

Best,

Clay

Co-CEO and Chief Investment Officer


Disclosures:

*Yield is as of 11/6/23. 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.

Titan Global Capital Management USA LLC ("Titan") is an investment adviser registered with the Securities and Exchange Commission (“SEC”). Titan’s investment advisory services are available only to residents of the United States in jurisdictions where Titan is registered. Please refer to Titan's Program Brochure for important additional information. Titan’s affiliate, Titan Global Technologies LLC (“TGT”), is a registered broker-dealer and member of FINRA/SIPC. For more information, visit our disclosures page. You may check the background of these firms by visiting FINRA's BrokerCheck. Contact Titan at support@titan.com. This content is intended for informational purposes only.

Performance results for any Titan strategies as compared against the performance of Illustrative Benchmarks are also for informational purposes only. “Illustrative Benchmarks” include the Standard & Poor’s 500 Index (the “S&P 500”), the Russell 2000 Index (the "Russell 2000"), and the MSCI ACWI ex US ETF ("MSCI World ex-US"). Titan’s investment program and strategies do not mirror that of the Illustrative Benchmarks, and volatility may be materially different from the volatility included in any Illustrative Benchmarks. The Illustrative Benchmarks are calculated and distributed exclusively by third parties, and not by Titan, and thus Titan cannot guarantee the accuracy or completeness of the data. Reference or comparison to an Illustrative Benchmark does not imply that Titan’s portfolio or strategies will be constructed in the same way as the Illustrative Benchmark or achieve returns, volatility, or other results similar to those of the Illustrative Benchmark.

The S&P 500, the Russell 2000, and the MSCI World ex-US are unmanaged market capitalization-weighted indices of common stocks chosen for market size, liquidity, and industry group representation to represent U.S. large cap, U.S. small/mid cap, and international equity performance, respectively. The S&P 500 and the Russell 2000 results include the reinvestment of dividends and do not reflect transaction costs. The MSCI World ex-US results reflect the expense ratio associated with the ETF, but do not reflect other transaction costs.

Titan's Smart Cash strives for tax optimization, but after-tax yields are estimates, and actual outcomes may vary. Yields are subject to market conditions and are not guaranteed. Smart Cash includes the Titan Cash Reserve and Treasury Fund offerings available on Titan, each with unique characteristics and risks. Please note, the 7-day yields of our Treasury Funds do not forecast future earnings. While Titan can provide general information and guidance, any information provided should not be taken as tax advice as Titan is not a tax professional. Titan strongly recommends consulting with a qualified tax professional regarding your specific tax situation for personalized advice and compliance with tax laws. View Smart Cash Risks & Disclosures at titan.com/smart-cash-disclosures.

Various Registered Investment Company products (“Third Party Funds”) are offered by third-party fund families and investment companies on Titan’s platform as one of many potential investment options available to Titan’s clients, that may or may not be recommended based on an individual client’s investment objectives and risk tolerance. Please review the Third Party Fund’s prospectus in its entirety for a full list of risks associated with investing in the Third Party Fund before making any investment decision. Certain Third Party Funds that are available on Titan’s platform are interval funds. Investments in interval funds are highly speculative and subject to a lack of liquidity that is generally available in other types of investments. Actual investment return and principal value is likely to fluctuate and may depreciate in value when redeemed. Liquidity and distributions are not guaranteed, and are subject to availability at the discretion of the Third Party Fund.

You may view the prospectuses for each Third Party Fund mentioned in this content through the hyperlinks below:

Communications may contain forward-looking statements, which reflect our current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements. We do not undertake any obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. References to specific stock performances are provided for historical context and are not indicative of future results. Valuation assessments in our communications are based on internal analysis and are for informational purposes only. They should not be the sole basis for investment decisions and may differ from others' views or assessments. No warranty is made regarding their accuracy or completeness.

All investments involve risk and the past performance of a security or financial product does not guarantee future results or returns. Keep in mind that while diversification may help spread risk, it does not ensure a profit or protect against loss. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. There is always the potential of losing money when you invest in securities or other financial products. Investors should consider their investment objectives and risks carefully before investing. The price of a given security may increase or decrease based on market conditions and clients may lose money, including their original investment and principal. The information provided does not take into account the specific objectives, financial situation, or particular needs of any specific person. This is not an offer, solicitation of an offer, or advice to buy or sell securities, or any other product offered by Titan or any third party. Please visit www.titan.com/legal for important disclosures. 

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