Evening Note

Having blogged at you plenty already today, I’ll keep this evening’s note brief and to the point.

Each day I have a set routine that starts with a pre-market review of the overnight and early-morning action in equity, fixed income, currency and commodity markets around the world, as well as volatility measures across key asset classes, plus all international data releases. During the trading session I spend my time reviewing and exploring macro developments, considering/reconsidering my theses around our core portfolio construction and each of its components, as well as (these days) — with Nick’s help/expertise — constantly reviewing the efficacy of our options hedging strategy. Then, at the end of the day its back to virtually the same routine I begin each morning with, plus a thorough review of the equity market internals for the day. 

Of late I’ve been spending a bit more time on currencies, both the fundamentals affecting them, country by country, as well as what I’ve found to be key technical indicators around their movements. I find, particularly during times of heightened uncertainty, that currencies provide the clearest windows into real, global macro conditions.

In keeping with my opening promise (brevity), I’ll expound (in condensed fashion) only on credit markets and macro. 

In a nutshell, the credit markets remain, on balance, stressed. Not to the extent they were during the current equity bear market’s initial selloff, but certainly so relative to where they were, say, this time last year. And that, the improvement off the bottom, is due to — and the still relatively stressed levels are in spite of — the trillions of dollars worth of best efforts by the Fed.

As for sovereign fixed income, the developed world’s bond markets clearly reflect the desperate nature of global general conditions. 

Funny thing is, most of them (their respective yields) peaked with our own macro index back in 2018, then fell precipitously into mid-2019 when our index went negative and we began hedging portfolios. Yes, understanding macro is indispensable to portfolio management:

Here’s the 10-yr U.S. treasury yield from the day we initiated our index back in 2017:

Here’s our PWA Macro Index from inception:

They say, among asset classes, bonds are the best at telling the true macro story (I say, again, currencies are the immediate-term tell when uncertainty runs high). Clearly, our macro index foretold of what was to come, as it peaked a few month ahead of treasuries.

As you might imagine, one of the most often asked questions we field these days is, when will this all end? When do we expect to rotate back into growthy mode? 

While of course, per the above, a lot goes into our assessment, our proprietary index is key. We expect to begin incrementally rebalancing back to a growthier asset mix when we can confirm among multiple data points an improvement in their respective rates of change. 

This will show up on our graph first as a flattening, then a subtle curving in a positive direction, followed by a series of higher highs and higher lows. Typically, per our back-tests, as well as my own observations over 3+ decades, this begins to occur as the equity market is in full-on capitulation mode and virtually all hope among investors is finally lost. Essentially the opposite of the circumstances that had us rotate out of full-on growthy mode last year, when the market was screaming its way to fresh all-time highs. I.e., underlying macro conditions were rolling over as the party was still underway, to the point where the risk/reward setup no longer allowed us to ride the wave with our clients’ portfolios.

All of the above said, we take nothing for granted. While, per Mark Twain, history often rhymes, nothing says it has to repeat. Every cycle brings with it its own character and conditions; we must forever dig deep to discover the what’s, the whys, the wherefores and the drivers of current general conditions. 

I will say, however, that there is one thing that seems to never change, human (investor) nature. Hence, the similarities the current bear market shares with those past that we’ve been charting for you of late herein…

Have a nice evening,


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