Stocks and Bonds Continue to Move in Response to Interest Rates: Market Commentary from Cabana’s CEO – October 9, 2023

6 months ago

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Stocks and bonds continue to move in response to interest rates. Rising rates have resulted in falling stocks and bond prices for the past two months. The focus last week was on jobs data and whether the relative strength or weakness will move the Fed to raise rates again or end its inflation fighting campaign – and maybe even cut rates sometime in 2024. The all-important 10-Year Treasury bond climbed all the way to 4.8% early in the week before a weak payroll report on Wednesday dropped rates and caused stocks to bounce. All eyes then turned to Friday’s unemployment report. The consensus going in was that if the number of new jobs created last month exceeded estimates of 170k, yields would rise, and stocks would resume their decline. That makes sense considering what we just saw on Wednesday. Well, the number came in way above estimates at 336k. Just as predicted, stocks and bonds immediately sold off and the 10-Year Treasury jumped to 4.86%. Then the entire market complex reversed, and stocks finished the day up almost 1% and the 10-Year yield pulled back below 4.8%. This is a head scratcher to say the least and we will have to see how this plays out over the next few days. 

What is pretty clear to me is that the stock market is trying to hold support at the 420 level (SPY). The market-cap weighted S&P 500 (SPY) and Nasdaq are about the only soldiers left on the field. The Dow, aggregate bond index, treasuries, small cap index, equal weight S&P 500 (RSP) and most sectors of the S&P 500 have turned negative for the year and are below their 50- and 200-day moving averages. As such, a break below 420 will likely result in more selling of stocks. 

Another index to watch as a recession indicator is the retail sector (XRT). This reflects companies sensitive to consumer spending. It is consumer spending that accounts for the majority of the nation’s GDP. With rates still rising, it is worth thinking about the tapping out point. I’ve included a one-year chart of XRT below. In my view, this is further evidence of the precarious situation our economy finds itself in. Data like jobs numbers are backward looking and the stock market is forward looking. If you take that as true, then the consumer has some struggles ahead. 

One of our Dallas family office clients had a good question last week about how the market could be still bullish overall but at Cabana, we are in bearish positions. I thought it was important to explain. Our system, Cabana’s Cyclical Asset Reallocation Algorithm (CARA) segments the market into what we call “scenes”. This is done through aggregating fundamental and technical data to give us an idea of how the economy is doing and, by proxy, the markets. There are several layers to this, and we try not to predict the future but rather invest based upon what is in front of us today. Typically, market indices, as well as fundamental data like earnings and interest rates are correlated and track one another. Occasionally, they disconnect and don’t track. That has been the case for much of the past eighteen months. This can result in volatility whereby stocks and bond prices whipsaw in large moves in both directions. We have touched on this several times this year including last week, and it remains the case today. 

CARA is designed to protect first and respond to corrections – even in bull markets. After all, we never know when a “correction” is going to become something worse. Right now, much of the stock market is struggling and the bond market is in a historic bear market. Big tech is the exception, and it has become in many ways the driver of economic growth in this country. It is that segment that has pulled us forward this year – and that is the bull market that I refer to. CARA has signaled a return to a bear market allocation as a result of deteriorating conditions across all stocks. That is why our current holdings are “bearish”. She doesn’t watch the technology sector independently and is not concerned per se with one or two or even three sectors. She tries to evaluate how everyone is doing. And right now, “everyone” is struggling. I however watch other things and comment on what I see outside of CARA. Right now, I see that a new bull market remains in play because of the resilience of big tech and its effect on other market participants, including individual investors and their psychology. But we do NOT invest based on what I think. We invest based upon CARA’s output. 

Our Target Drawdown Portfolios are in our Safety Valve and Bearish Scene, allocated to short duration treasuries. Our Target Beta Portfolios are allocated consistent with their Target Beta in a Bearish Scene.  

1-Year XRT Performance as of 10.6.2023:  

Disclaimers

January 17, 2024

This material is prepared by Cabana LLC, dba Cabana Asset Management and/or its affiliates (together “Cabana”) for informational purposes only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. This material may only be distributed in its original format and may not be altered or reproduced without the prior written consent of CabanaThe opinions expressed reflect the judgement of the author, are as of the date of its publication and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by Cabana to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by Cabana, its officers, employees or agents.  

“CARA” is Cabana’s Cyclical Asset Reallocation Algorithm. Scenes assigned as per the judgment of The Cabana Group. Scene names and number of scenes have changed over time in an effort to obtain efficiencies and provide clarity of investment objective. 

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Past performance is no guarantee of future results. All investment strategies have different degrees of risk and the corresponding potential for profit or loss. Asset allocation and diversification will not necessarily improve returns and cannot eliminate the risk of investment losses. “Target Drawdown” is merely a descriptive term used to describe the general strategy and objective of the portfolio, it is not a guarantee, nor should it be construed to suggest safety or protection from loss. There is no guarantee that portfolio performance will remain consistent with the targeted drawdown parameter. While risk tolerance and targeted “drawdown” are identified on the front end for each portfolio, Cabana’s algorithm does not take any one client’s situation into account and there is no guarantee that Cabana’s strategies will be suitable for any investor. Investors and advisors should not simply rely on the name of any portfolio to determine what is suitable. It is the responsibility of investment advisors to determine what is suitable for their clients. Cabana manages assets on multiple custodial platforms. Performance results for specific investors will vary based upon differences in associated costs and asset availability.  

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Commonly used index/benchmark definitions:  

All indices and categories are unmanaged and an individual cannot invest directly in an index or category. Index returns do not include fees or expenses. Benchmark indices will likely materially differ from Cabana’s portfolio strategies. Detailed information as to how the returns are calculated can be obtained online from the following link: https://thecabanagroup.com/disclaimers/performance-reporting-methodology/. 

Morningstar’s Moderate Target Risk index  follows a moderate equity risk preference and is based on well-established asset allocation methodology from Ibbotson Associates, a Morningstar company.  

Morningstar’s Tactical Allocation category includes portfolios that seek to provide capital appreciation and income by actively shifting allocations across investments. These portfolios have material shifts across equity regions, and bond sectors on a frequent basis. 

The S&P 500 Index is a market-capitalization weighted stock market index of 500 widely held large-cap stocks often used as a proxy for the U.S. stock market.  

The Russell 2000 and 3000 indices are market-capitalization weighted stock market indices that include, respectively, 2000 and 3000 of the most widely-held stocks and are often used as proxies for the U.S. stock market. 

The Nasdaq Composite Index is a market-weight capitalization index that covers more than 3,000 stocks listed on the Nasdaq Stock Market. What is the Nasdaq Composite, and What Companies are in It? | Nasdaq