Much of October was characterized by volatile, mostly falling equity markets and investors were anxiously looking for signposts to give them confidence about the direction that markets will take. How much worse do things get? Is there some reassurance to come that the creeping pessimism will dissipate? At its worst, intra-day during the 29th of October, the S&P was down by almost 10.7% relative to the end of September. Such a loss naturally prompts a lot of questions.
A thousand explanations are forthcoming for the market moves in October. Investors are nervous about corporate earnings, rising interest rates, trade wars, Brexit, indebtedness. While each might be an interesting subject to analyse or reflect on, to us these are concerns that should affect markets in a more medium-term manner rather than having relevance from week to week in guiding us on how to position and transact. Nor have concerns over these subjects suddenly come into being.
Does this mean we prefer to dismiss recent market movements as overdone? Not at all. Markets will do whatever they need to do in order to find a suitable equilibrium and should be regarded as right, or at least in the process of adjusting in the right direction.
It is often fruitless to scrutinize past movements and attribute effects to causes and tie them into a neat narrative. Although it can feel satisfying to fashion an interesting explanation of the past, it is often of little or no use in knowing how to trade today and tomorrow. Risk aversion has certainly risen, and market movements have reset a number of expectations about stock and bond prices. At the same time there have been distinct moves by some sectors relative to market aggregates, as well as rotations within sectors.
With disruptions comes a need for markets to reset and reach for a new equilibrium. Markets are in fact doing this all the time, however the disruptions are usually not this significant therefore the adjustments are not of the magnitude and swiftness we are currently seeing.
Current circumstances are ideal for MarketsFlow, which, using advanced data science, discerns where adjustments are beginning to take place, down to the stock level, and judges the likely strength and direction of those over the coming days. It then translates these into a guideline for how a particular client portfolio should be invested. This includes the aggregate degree of market exposure, as well as stock selection, position sizing, and other numerous refinements including when to take exposures via options, for portfolios approved to do so.
For much of October, compared with usual, we remained less invested, traded more frequently and made more use of options. When invested in a stock, we have been less demanding on the upside before taking a profit.
The latest week, however, has been quite different, with some significantly positive days, and a different shape to market behavior. Here we have increased the average extent to which we are invested and been a little more demanding on the upside before closing out a position.
The overall effect has been to limit downside and build outperformance, particularly in periods in which markets have suffered. Our performance of 0.46% for October (net of fees) in our main large cap US product compares extremely favourably to the S&P500 index which had a loss of 6.94%.