Today I would like to share with you the third quarter commentary from Beaumont Capital Management, one of the Portfolio Strategists we utilize for client accounts. Beaumont seeks to limit downside, but has struggled this year in doing so as all major asset classes are down. In their commentary they discuss the reason for this as well as expectations going forward in the market.
What started as a summer of optimism in markets ended with a fall of fear. Tough talk from the Federal Reserve and August’s inflation print brought equity and fixed income markets broadly towards new lows to close out the quarter.
This remains an extraordinarily challenging and unpredictable investment environment due to exogenous events (Covid/China supply-chain bottlenecks, Ukraine War/Europe Energy crisis) and the unprecedented government fiscal and interest-rate interventions in the economy.
Although our returns in this year’s market turmoil don’t stand out, the Decathlon system has correctly identified short term trading opportunities, both to buy and to sell. While many of these opportunities have been fleeting due to the unprecedented public media commentary by Federal Reserve which is whipsawing the market and our portfolios, we think they will ultimately continue to slowly accrue to our performance via positive selection effects.
Looking ahead, our strategies are positioned near their neutral or average equity exposure at each risk level. The probabilistic machine learning models that are the foundation of the Decathlon system suggest that equities are “oversold” and offer favorable risk-reward, likewise for bonds. Aside from our statistical and behavioral-based quantitative systems, there is plenty of qualitative evidence that investors are very fearful and already girded for substantial further market declines. We believe downturns are less likely to occur when investors are braced for them. Therefore, both quantitatively and qualitatively, our assessment is that it’s a timely entry point, that the actual risk is less than the perceived risk, and that being somewhat contrarian will pay off.
Neutral weightings are by no means bold, but it feels that way in the current high-anxiety investment environment.
Furthermore, after the 3% upward shift in the yield curve this year and the worst drawdowns on record for fixed income and traditional balanced strategies, the forward returns of a 60/40 type portfolio are likely higher than they have been in many years. While the recent performance of balanced portfolios has been frustrating for all investors, we expect balanced strategies to provide attractive absolute returns in most market scenarios with less volatility and mental stress than recently experienced.