top of page

Market Update and Model Portfolio Reviews 03/31/2023


By Dustin Latham, CFA, CAIA, CRPC

 

April 1, 2023

Market Update 2023-03-31.png

DISCLOSURE (Click links for sources. If in print, sources available upon request). Calculations & Definitions available upon request. Investment Grade Bonds measured by the S&P U.S. Aggregate Bond Index. S&P 500 Total Return Index**. *Trailing returns as of 03/31/2023 and are annualized returns if over 1-Year.  See “Model Disclosure” page for important disclosures and information – Total Period Measured 12/31/2016 – 03/31/2023.  “Inception” refers to Inception to Date. Inception calculation assumes end of day market prices on 12/30/2016 for starting period values to calculate Inception to Date figures.  Performance presented net of highest advisory fee. Views and opinions are of Alternative Capitalis, LLC and are not intended as investment advice or recommendation(s). The results do not represent actual trading and actual results may significantly differ from the theoretical results presented. Past performance is no guarantee of future results.

Global Equities were rocky through the month but finished up 2.45% and up 6.94% on the year.  Domestic equities pared losses early in the month to finish up 3.67% and up 7.50% year to date.  Emerging Markets recovered 2.16% and up 2.90% on the year.  The Treasury yield curve (interest rates) was extremely volatile in March (see Treasury volatility chart further below) and ultimately moved lower.  With yields moving inversely to price, prices were generally higher for most fixed income and as a result, Domestic Investment Grade Bonds finished up 2.31%. March started as Risk-On across markets but quickly changed gears to the downside.  With perceived concerns of a banking crisis settling down in the back end of the month, the runway was cleared for a relief rally in risk assets.  

Headline Economic & Market Data 2023-03-31.png

See, “Headline Economic & Market Data - Data Links” at end of report for more information about the data sources.

The Federal Reserve raised interest rates by another 0.25% to a range of 4.75-5.00% marking the ninth increase in as many meetings totaling 4.75% of total rate increases for this tightening cycle.  Markets remain at odds over “where” and “when” the Federal Reserve will stop tightening interest rates and we believe the important risk related to “why” is being ignored by observance of market prices rising.  This is more obvious when comparing the bond market and money continuing to flow into safer haven Treasuries while simultaneously seeing a bid in equity prices.  Markets are in a rush to price in the recovery when the lagged effects of monetary policy are starting to work through the economy. Similar measures by the Federal Reserve to increase their balance sheet during the great financial crisis and the onset of Covid-19 should not be confused with the recent balance sheet expansion to stabilize the financial system.  The market seems to continue to ignore 1) inflation data that is sticky, the 2) Federal Reserve’s intent to not cut interest rates this year and use the 3) joint measures to sure up banking turmoil - as a tail wind for risk assets.

​

We do not want to lose sight of the bigger issue and that is, wait for it – you guessed it – long and variable lags of monetary policy. The data right now seems most relevant, because that is what is available, but there needs to be an expectation adjustment for what the future relevant data will be.  It might feel as if we are looking for a pinhole in a wall but when the sledgehammer replaces that pinhole all the pinhole searching will become irrelevant.  If you haven’t kept up with my commentary or as a friendly reminder, we continue to exhaust the concerns of the lagged effects of tighter financial conditions (higher interest rates, tougher lending standards – for example).  The banking issues surfacing in March are one of the early casualties of this monetary tightening cycle (we marked the one-year anniversary of the tightening cycle in March).  It’s easy to correlate the issues within banks as a cause for a future recession, but to some defense of banks more generally is the side effects of over a decade with globally ultra-low interest rate across developed countries. About six months ago we highlighted the market being ahead of the Federal Reserve’s actions, “It is still odd to see the market’s peaking here before the first rate hike.” It is not often that we would expect the market to bottom before the Federal Reserve has stopped raising rates.  This is one of the reasons we believe that markets still have room to fall through the October 2022 lows.  There are periods when this was not the case, however, the inflation environment, corporate debt levels and labor market environment were all different during those periods relative to today.  With the most recent data, there’s likely more room for markets to rise from here but eventually the full impacts of interest rate tightening, and the “why,” will come front and center with markets facing an abrupt, and seemingly unforeseen, decline.  With what we see as an inevitable market descent we will continue to try to identify assets equipped with parachutes and not cinderblocks. 

It is not often that we would expect the market to bottom before the Federal Reserve has stopped raising rates, and it’s more often after Fed starts cutting rates.

​

The Treasury yield curve (interest rates) was extremely volatile in March to levels not seen since the onset of the Pandemic and before that the Great Financial Crisis.  The cautionary take on this chart is that the diverging views of interest rates are extreme, and a reasonable expectation of interest rate volatility can very well play through the rest of risk assets. 

US2Y Bond Yield Volatility chart built on koyfin not drawn to scale and rolling one month volatility calculated by koyfin.

Banks (or more accurately deposits) should be fine with the actions taking by the FDIC, Federal Reserve, and Treasury, and for the most part are collateral damage in the bigger picture.  Like with other industries there will be cases of bad management and bad apples will rise to the surface.  However, we should not downplay the risk in banking.  

​

The present banking issue has been associated with the decline in bank deposits.  Before the decline in bank deposits was a period of tremendous growth in deposits.  The prevailing logic is that if the factors that drove the growth in deposits are reversed, then the deposits themselves should also reverse.  We turn to the research from the FEDS Notes in which they identify four factors they believe relate to the growth in Bank Deposits: 1) the initial spike in commercial and industrial (C&I) credit line drawdowns at the onset of the pandemic; 2) asset purchases by the Federal Reserve; 3) large fiscal transfers to households more likely to hold savings in the form of deposits; and 4) a higher personal savings rate. 

Drawdowns in Banking deposits recalculates deposits at All Commercial Banks by using the SA (Seasonally Adjusted) weekly Wednesday level of Deposits of All Commercial Banks minus the corresponding SA weekly Wednesday level of Large Time Deposits of All Commercial Banks.  Not Drawn to scale.  Drawdown chart and calculations by Alternative Capitalis, LLC and are believed to be accurate but should not be relied upon. 

We then used data from the Federal Reserve netting the effects of deposits and what is generally accepted as certificates of deposits (CDs) to see how the recent net withdrawals impacted financial markets.  Although there are different ways to measure and illustrate the relative change (such as using the natural log), we opted to use the drawdown because it pairs with (at least in our view) what is recently occurring to deposits at the industry level while providing a sense of relativeness for a larger time period of comparison.  There is one other time period where the drawdowns were worse than what has been observed through most recent data as of this commentary, and that was not an environment we would want to relive through varying market exposures.  Deposit flight, inflation persisting, and still waiting downstream from a crumbling dam of monetary tightening….  This is not our idea of a compelling environment to be adding risk.

Still Seeing the Fallout From a Challenging 2022 for Bonds

Unrealized Gains Losses at Banks 2023-03-31.png

FDIC chart was altered with comments for illustration purposes by Alternative Capitalis, LLC. 

We can relate much of our fixed income performance in 2022 with the banking crisis that unwound in March.  As interest rates rose, the bond market performed poorly (mechanically expected) and as with our investments we had both realized an unrealized losses in 2022.  However, most of us can separate the longer-term nature of investing versus our shorter-term expectations to be able to move our banking deposits almost frictionless and without worry to cover daily expenses.  We put a dollar into a bank deposit, we expect to get a dollar back.  When investors ignore the risks of rising interest rates and suffer unrealized losses the rational train of thought is that investments involve risk including loss of principal, while our deposits should be whole and intact upon demand.  When a large segment of the banking industry opts to ignore the risk of rising rates and other financial institutions offer higher incentive savings rates to pull funds from one institution to another, well that creates a natural deposit churn between banks.  This is an oversimplification of the lead up to why these risks were left naked, but when the deposit churn flight for higher savings rates continued, now banks are forced to sell off bonds at depressed values to return those deposits on demand.  We initially viewed the likes of SVB as an opportunity for larger banks to take in more deposits and following a long weekend of more restlessness, we actually found more conviction in the joint efforts and measures by the FDIC, Federal Reserve and Treasury.  So, we continued to add to our banking positions. 

​

Before we could get to the next weekend, all of this again came back into doubt as what seemed to be a repeat of measures taken most recently with the Federal Reserves willingness to expand their asset purchase program during the onset of the pandemic, was quickly overshadowed by multiple third-party banks stepping in to provide temporary life support of another otherwise failed depositor.  When we have these levels of doubts, and noticeably so much of the industry narrative sharing their lack of understanding, we have to swallow our pride, ignore our gut and ponder which side of wrong do we want to come out on.  We would rather be wrong and miss out on the upside than be wrong and eat the downside.  Humbly these events are so obvious in hindsight, but in real time we make educated guesses while being measured with our appetite for risk.  The near-term upside appears to be limited given how much we still need to work out, while the underlying economy generally appears strong.   Another issue is the inherent financial tightening that we believe will occur due to options for lending to the general nonfinancial institution public being reduced.  This is hard to parse out but if an otherwise healthy bank is more or less being forced to lend to another bank by way of short-term deposits (which is essentially what occurred when eleven banks deposited roughly $31 Billion into First Republic Bank) that has an impact on overall lending to traditional borrowers.  This belief seems to be confirmed through Jerome Powell’s press conference after the scheduled interest rate decision in which he states:

the events of the last two weeks are likely to result in some tightening credit conditions for households and businesses and thereby weigh on demand on the labor market and on inflation. Such a tightening in financial conditions would work in the same direction as rate tightening. In principle as a matter of fact, you can think of it as being the equivalent of a rate hike or perhaps more than that, of course it's not possible to make that assessment today with any precision whatsoever.

Asset Allocation Positioning and Model Changes for Month Ended 03/31/2023

Although our actions this month were bold, it also seems bold to think that this time should be different than other tightening cycles given the reversals of substantial monetary and fiscal expansion. March historically tends to be a volatile month and otherwise presents a good buying opportunity over longer periods.  We end the month pleased with our overall performance although lagged in the second half of March resulting in relative underperformance month over month.  We find comfort in our historically elevated levels of short-term cash alternative Treasury securities exposures and actual cash levels.  Our big risk at month end (as we experienced in the last week of March) is that we are out of position for a recovery in equity prices while we see our risk to the downside being reduced with our aggressive levels of cash alternatives. 

DISCLOSURE (Click links for sources. If in print, sources available upon request). Calculations & Definitions available upon request. Investment Grade Bonds measured by the S&P U.S. Aggregate Bond Index. S&P 500 Total Return Index**. *Trailing returns as of 03/31/2023 and are annualized returns if over 1-Year.  See “Model Disclosure” page for important disclosures and information – Total Period Measured 12/31/2016 – 03/31/2023.  “Inception” refers to Inception to Date. Inception calculation assumes end of day market prices on 12/30/2016 for starting period values to calculate Inception to Date figures.  Performance presented net of highest advisory fee. Views and opinions are of Alternative Capitalis, LLC and are not intended as investment advice or recommendation(s). The results do not represent actual trading and actual results may significantly differ from the theoretical results presented. Past performance is no guarantee of future results.

Headline Economic & Market Data - Data Links

Disclosure WARRANTIES & DISCLAIMERS

There are no warranties implied. Alternative Capitalis, LLC (“RIA Firm”) is a registered investment adviser located in Massachusetts. Alternative Capitalis, LLC may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. Alternative Capitalis, LLC’s presentation is limited to the dissemination of general information pertaining to its advisory services, together with access to additional investment-related information, publications, and links. Accordingly, the publication of Alternative Capitalis, LLC’s presentation should not be construed by any consumer and/or prospective client as Alternative Capitalis, LLC’s solicitation to effect, or attempt to effect transactions in securities, or the rendering of personalized investment advice for compensation, over the presentation. Any subsequent, direct communication by Alternative Capitalis, LLC with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For information pertaining to the registration status of Alternative Capitalis, LLC, please contact the state securities regulators for those states in which Alternative Capitalis, LLC maintains a registration filing. A copy of Alternative Capitalis, LLC’s current written disclosure statement discussing Alternative Capitalis, LLC’s business operations, services, and fees is available at the SEC’s investment adviser public information website – www.adviserinfo.sec.gov or from Alternative Capitalis, LLC upon written request. Alternative Capitalis, LLC does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Alternative Capitalis, LLC’s presentation or incorporated herein, and takes no responsibility therefor. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. This presentation and information are provided for guidance and information purposes only. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy. This presentation and information are not intended to provide investment, tax, or legal advice.

Disclosure

Alternative Capitalis, LLC is a registered investment adviser. Information presented herein is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. *101 Federal Street, Suite 1956A, Boston, MA 02210 is Alternative Capitalis, LLC’s client facing address. All books, records, receipts, correspondence (mailing address) and day to day operations are located at 1565 West St, Wrentham, MA 02093. For more information, please visit https://www.altcapitalis.com/disclosure and https://www.altcapitalis.com/fee-table-for-services.

​

Model Performance Disclosure: The performance shown represents only the results of Alternative Capitalis, LLC’s model portfolios for the relevant time period and do not represent the results of actual trading of investor assets.  Model portfolio performance is the result of the application of the Alternative Capitalis, LLC’s proprietary investment process.  Model performance has inherent limitations. The results are theoretical and do not reflect any investor’s actual experience with owning, trading or managing an actual investment account. Thus, the performance shown does not reflect the impact that material economic and market factors had or might have had on decision making if actual investor money had been managed. Model results are based on discretionary trading that are not purely quantitative or rules based.  Model portfolio performance is shown net of the model advisory fee of 1.25%, the highest fee charged by Alternative Capitalis, LLC.  This reflects a change from Alternative Capitalis, LLC highest fee charged to a client(s) account from 1% to 1.25% annually.  April 1, 2018 model performance to most recent date presented adjusts for the higher 1.25% annual fee. Model portfolio performance is shown net of the sample trading costs based on our at the time Custodian’s, TD Ameritrade Institutional, trading costs. Performance does not reflect the deduction of other fees or expenses, including but not limited to brokerage fees, custodial fees and fees and expenses charged by mutual funds and other investment companies. Performance results shown include the reinvestment of dividends and interest on cash balances where applicable. The data used to calculate the model performance was obtained from sources deemed reliable and then organized and presented by Alternative Capitalis, LLC.   The performance calculations have not been audited by any third party. Actual performance of client portfolios may differ materially due to the timing related to additional client deposits or withdrawals and the actual deployment and investment of a client portfolio, the reinvestment of dividends, the length of time various positions are held, the client’s objectives and restrictions, and fees and expenses incurred by any specific individual portfolio. The performance calculations are based on a hypothetical investment of $100,000 for both the model and benchmarks presented.

​

Removal of Certain Benchmark Fees as of January 31, 2023: This will not impact how the hypothetical returns are presented for the Model Performance Returns.  Benchmark performance calculations for reports generated prior to January 31, 2023, were inclusive of the highest possible advisory fee charged to any client(s) account, 1.25% annually.  This reduced the total return of the investable benchmark by an annualized rate of 1.25%.  Effective January 31, 2023, the benchmarks no longer include the assumption of an advisory fee, and therefore the benchmark returns are no longer reduced by an advisory fee as of the trailing hypothetical results starting January 31, 2023, and thereafter.  This means that reports on and after January 31, 2023, will report hypothetical benchmarks without the advisory fee included.  The benchmarks trailing results presented on and after January 31, 2023, that previously included this hypothetical fee are now reported with advisory fees of 0.00% assumed.  Month end reports, for example on December 31, 2022, will not be updated to restate this difference of removal of hypothetical advisory fees on the benchmarks.  Performance presentation of rolling periods for as of dates on and after January 31, 2023, will backfill benchmark performance as if there were never an additional 1.25% annually deducted from the benchmarks.  This will otherwise, if all periods were restated prior to January 31, 2023, cause the benchmarks to produce better results by an approximate annualized 1.25%. 

​

Domestic Benchmarks: The Model performance results shown are compared to the performance of two series of hypothetical, albeit directly investable, benchmarks which we refer to as Domestic Benchmarks and Global Benchmarks.  The Domestic Benchmark is a blended ETF (Exchange-Traded-Fund) portfolio comprised of the following two ETF’s symbols, SPY & AGG, and are described below.  The benchmarks used are investable ETFs, presented using hypothetical results.  The ETF symbol SPY (SPDR® S&P 500® ETF Trust) which seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the S&P 500® Index (the “Index”).  Visit https://us.spdrs.com/en/etf/spdr-sp-500-etf-SPY for more information about the ETF. The S&P 500® Index results do not reflect fees and expenses and you typically cannot invest in an index.  The ETF symbol AGG (iShares Core U.S. Aggregate Bond ETF). The iShares Core U.S. Aggregate Bond ETF seeks to track the investment results of an index composed of the total U.S. investment-grade bond market. (the “Index”). Visit https://www.ishares.com/us/products/239458/ishares-core-total-us-bond-market-etf for more information about the ETF. The index composed of the total U.S. investment-grade bond market results do not reflect fees and expenses and you typically cannot invest in an index.  The benchmark is blended representing a weighting of a percentage (%) to SPY and percentage (%) to AGG based on the respective model weights further below.  The benchmarks are set to rebalance at each year end.  Except for year end, and unless otherwise indicated, the benchmarks are not rebalanced to maintain their original weighting over the period measured.  Instead, they are comprised of the starting allocation of each respective trailing hypothetical result presented and will shift given the prevailing market environment over the period measured.

​

Domestic Benchmark Return Comparison: To benchmark the results, the ETF (exchange-traded-fund) symbol SPY (SPDR® S&P 500® ETF Trust) which seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the S&P 500® Index (the “Index”).  The S&P 500 was chosen as it is generally well recognized as an indicator or representation of the stock market in general and includes a cross section of equity holdings.  In addition, the ETF symbol AGG was chosen as a benchmark. The iShares Core U.S. Aggregate Bond ETF seeks to track the investment results of an index composed of the total U.S. investment-grade bond market.  The total U.S. investment-grade bond market was chosen as it is generally well recognized as an indicator or representation of the bond market in general and includes a cross section of debt holdings. For each respective model benchmark the performance measurement weightings are as follows to SPY / AGG %: 20/80, 30/70, 40/60, 50/50, 60/40, 70/30, 80/20, 90/10 % respectively for Ultra Conservative, Conservative, Moderate, Balanced, Growth & Income, Growth, Aggressive, Ultra Aggressive.

​

Global Benchmarks: The Model performance results shown are compared to the performance of two series of hypothetical, albeit directly investable, benchmarks which we refer to as Domestic Benchmarks and Global Benchmarks.  The Global Benchmark is a blended ETF (exchange-traded-fund) portfolio comprised of the following three ETF’s symbols, VT, BNDX & BND, which is described below.  The benchmarks used are investable ETFs, presented using hypothetical results.  The ETF symbol BNDX (Vanguard Total International Bond ETF) attempts to track the performance of the Bloomberg Barclays Global Aggregate ex-USD Float Adjusted RIC Capped Index (USD Hedged). Visit https://investor.vanguard.com/etf/profile/BNDX for more information about the ETF. The ETF symbol VT (Vanguard Total World Stock ETF) seeks to track the performance of the FTSE Global All Cap Index, which covers both well-established and still-developing markets.  Visit https://investor.vanguard.com/etf/profile/VT for more information about the ETF. The ETF symbol BND (Vanguard Total Bond Market ETF) attempts to track the performance of the Bloomberg Barclays U.S. Aggregate Float Adjusted Index and attempted to track the Bloomberg Barclays U.S. Aggregate Bond Index through December 31, 2009. Visit https://investor.vanguard.com/etf/profile/BND for more information about the ETF.  The benchmark is blended representing a weighting of a percentage (%) to BND, percentage (%) to VT, and percentage (%) to BNDX based on the respective model weights further below. The benchmarks are rebalanced over periods that include a calendar year end date, on the calendar year end date, to their original weighting over the period measured.  The Benchmarks are comprised of the starting allocation and will shift given the prevailing market environment over the period measured. 

​

Global Benchmark Return Comparison: To benchmark the results, the ETF symbol BNDX (Vanguard Total International Bond ETF) attempts to track the performance of the Bloomberg Barclays Global Aggregate ex-USD Float Adjusted RIC Capped Index (USD Hedged). The Vanguard Total International Bond ETF was chosen as it is generally well recognized as an indicator or representation of the global bond market, ex-U.S. bonds, and tracks an investment-grade, non-USD denominated bond index, hedged against currency fluctuations for U.S. investors.  The ETF symbol VT (Vanguard Total World Stock ETF) seeks to track the performance of the FTSE Global All Cap Index, which covers both well-established and still-developing markets. The Vanguard Total World Stock ETF was chosen as it is generally well recognized as an indicator or representation of the global stock market and tracks a market-cap-weighted index of global stocks covering approximately 98% of the domestic and emerging market capitalization. The ETF symbol BND (Vanguard Total Bond Market ETF) attempts to track the performance of the Bloomberg Barclays U.S. Aggregate Float Adjusted Index and attempted to track the Bloomberg Barclays U.S. Aggregate Bond Index through December 31, 2009. The Vanguard Total Bond Market ETF was chosen as it is generally well recognized as an indicator or representation of the U.S. Domestic bond market, and tracks a broad, market-value-weighted index of U.S. dollar-denominated, investment-grade, taxable, fixed-income securities with maturities of at least one year. For each respective model benchmark the performance measurement weightings are as follows to BND/VT/BNDX %: 66/20/14, 57.8/30/12.3, 49.5/40/10.5, 41.2/50/8.8, 33/60/7, 24.7/70/5.3, 16.5/80/3.5 and 8.2/90/1.8 % respectively for the Ultra Conservative, Conservative, Moderate, Balanced, Growth & Income, Growth, Aggressive and Ultra Aggressive Global Benchmarks.

​

OPTIONS TRADING RISK DISCLOSURE: Options Trading – Both the purchase and writing (selling) of options contracts – involves a significant degree of risk not suitable for all investors.  Investors should carefully consider the inherent risks and financial obligations associated with options trading as further detailed in the Options Clearing Corporate booklet “Characteristics and Risks of Standardized Options.”

 

The results do not represent actual trading and actual results may significantly differ from the theoretical results presented

​

​

bottom of page