As we enter March, it seems clear that 2018 is not going to be a repeat of 2017. Last year, the S&P 500 posted positive returns every month on a total return basis, and volatility was beyond subdued. However, after making strong gains throughout most of January this year, equity markets have now run into headwinds and February was the worst month for equities in two years. The S&P 500 Index ended February with a decline of -3.9 percent1. Our 3EDGE strategies also declined in value during February, but less than the S&P 500 and well within our expectations for the particular risk/return targets that we set for each strategy. It would be nice to never have to suffer declines in the value of our portfolios, but unfortunately that would also mean an investment strategy that would not generate any returns, since markets never give you something for nothing. It is also important to remember that the equity markets have rallied for an extended period (multiple years) and so they were ripe for a correction.
A combination of factors is causing consternation in the global markets including uncertainty at the Fed, the potential for higher interest rates and inflation, and now the potential for trade wars. On the last day of February, the new Fed Chair Jay Powell, delivered a generally upbeat assessment of the U.S. economy and his comments seem to have investors concerned that perhaps the Fed will raise rates faster in 2018 than markets were anticipating. In response to Powell’s remarks, equities declined sharply. This is an example of good news on the economy being perceived as potentially bad news for the equity markets since a strong economy could raise the specter of rising inflation, causing the Fed to raise interest rates too fast, thereby choking off future economic growth. Then, in the first days of March, President Trump began making public statements about imposing tariffs on imported steel and aluminum. These remarks took the markets by surprise and equities declined again, this time over fears of a potential trade war.
At 3EDGE, we recognize the possibility that interest rates may move higher from here. After almost a decade of low interest rates and subdued inflation, the global markets may now need to adjust to more normal (higher) levels of inflation and rising interest rates, as well as the possibility that the cost of money may rise even if inflation does not. It also seems clear that in 2018 market volatility will be more pronounced than it was in 2017. None of these circumstances need to sound the death knell for equities going forward. The current environment of rising — but still quite low — interest rates, positively sloped yield curves, narrow credit spreads, corporate earnings growth and synchronized global economic growth could still be supportive of equities. Our proprietary model of the global capital markets continues to rank equities as somewhat attractive but not as attractive as they were in 2017; therefore, consistent with our research, we have reduced our exposure to equities this year. It is a possibility that the economic cycle may be moving towards a period when inflation, which has been very low for a long time, may begin to increase. This could mean that in the future we may increase our exposure to real assets including commodities and gold, among others.
It is important to point out, particularly during periods of increased volatility and market declines, that we have an experienced investment team that has worked together for many years, and we have been through a number of market corrections before. We will continue to run our proprietary research models and keep a close eye on the global economy and the capital markets. Our investment committee has plans in place that consider various future scenarios in order to be prepared to make any necessary changes to our investment strategies as needed.
If you have specific questions or concerns about what is transpiring in the global markets we encourage you to reach out to your relationship manager at 3EDGE.
All the best.
DeFred G. Folts III
Chief Investment Strategist
3EDGE Asset Management, LP
DISCLOSURE: The opinions expressed above are provided by 3EDGE Asset Management (“3EDGE”) and are subject to change without notice in reaction to shifting market conditions. 3EDGE’s opinions are not intended to provide personal investment advice and do not consider the investment objectives and financial resources of the reader. These observations include information from sources 3EDGE believes to be reliable, but the accuracy of such information cannot be guaranteed. Investments in securities, including common stocks, bonds, commodities and ETFs, involve the risk of loss that investors should be prepared to bear. Past performance may not be indicative of future results.