A snapshot of last week’s market performance and what to watch in the week ahead from Chadd Mason, Cabana CEO and co-founder.
Equity markets continue to try and stabilize after the sudden drop that began earlier this month. Broad U.S equity markets are now down between 5.5% and 7% since their September highs. Bond yields have settled and are trading in a range between 3.15% and 3.24% on the 10 Year. This follows a 20 basis point surge that occurred the first week of October. Equity markets are following bond markets (as they typically do). Yields must calm down for our stock markets to find their footing. We appear to be at a critical juncture in this very old bull market. Major domestic equity indexes are sitting right at or below the 200-day moving averages and we are threatening to break trend lines that began in early 2016. Advancing stocks are outnumbered by declining stocks – and by a wide margin. Small cap stocks are leading the market down and are well below the 200-day moving average. This is not a good sign knowing that small caps tend to lead up or down at market turns. Foreign equities are all deeply in the red for the year and can’t seem to find a bottom. All in all, this has been a tough year for investing. Cabana executed a scene change on October 11 and reallocated to a more defensive position, which has proven prudent. Since the reallocation, all of our core portfolios are up as of this writing. We are right in the middle of earnings season, with a huge slate of important companies due to report this week. The response to these earnings will likely dictate whether this month’s drop was a small correction within a much larger uptrend or if it is the beginning of a deeper and more serious pullback. I suspect we will know a lot more by the close on Friday. We remain cautiously bullish.
Lastly, an adviser recognized and pointed out that in our October scene change, Cabana’s Aggressive Core Tactical Portfolio reallocated to several international positions, namely Latin America and Australia. This is inconsistent with last week’s commentary, which provided that we generally reduced our foreign equity exposure. This adviser is correct, and I should have pointed that out. Our most aggressive portfolio has a 20% target drawdown and by definition is designed to purchase more volatile assets, such as commodity producers in oversold conditions. While we don’t “load the boat” with them, we do think it is appropriate to expose that portfolio to the opportunity.