When Beautiful Markets Turn Ugly – ValueWalk Premium
Beautiful Markets Turn Ugly

When Beautiful Markets Turn Ugly

October is keeping its reputation alive as the month to remember for major market declines

According to the Stock Trader’s Almanac, October is known as “the jinx month” due to the number of major selloffs that have occurred in the past. There were “crashes in 1929 and 1987,” the Almanac notes, along with “the 554-point drop on October 27, 1997, back-to-back massacres in 1978 and 1979, Friday the 13th in 1989, and the meltdown in 2008.”

Q3 hedge fund letters, conference, scoops etc

The dominant theme of 2018 has been the major trend reversal in global equities.

This year is shaping up to be the exact opposite story of 2017.

Beautiful Markets Turn Ugly

2017 Looking Back

2017 MSCI World Index

Total return: 21.62% –> big returns and positive trends

Volatility: 5.63% –> very low volatility

Beautiful Markets Turn Ugly

2018 Looking Forward

2018 MSCI World Index

Return: -2.36% –> Negative returns & negative momentum

Volatility: 10.91% –> 2x the volatility of 2017

We entered 2018 with beautiful performance trends from 2017 and immediately witnessed global equities begin to turn ugly in late January. Since that point, momentum has continued to deteriorate all year long culminating in October being the worst monthly return for equities since February 2009 if the month were to end today.

Here are some charts to help visually represent the broad global equity weakness that is masked if investors are only looking at the more popular relative strength leader of the S&P 500.

Beautiful Markets Turn Ugly

Beautiful Markets Turn Ugly

Beautiful Markets Turn Ugly

Beautiful Markets Turn Ugly

Is The Party Over?

It’s very possible that the global equity bull market music has stopped.

But people are clearly still dancing.

The current U.S. bull market is still the longest on record without a -20% correction.

However, from our unique vantage point of data driven market trends, the wide spread global equity market momentum change of 2018 is significant and could be an early warning signal for investors. The recent market cycle has seen record low volatility that has masked the real risks of investing in equities for several years. The next market cycle is likely to see a more normal environment including lower relative returns for stocks and higher relative volatility.

Beautiful Markets Turn Ugly

Beautiful Markets Turn Ugly

Swimming Naked When The Tide Goes Out

Recently traditional stock & bond portfolio Sharpe ratios have abnormally benefited from historically low market volatility and high returns. The real value of non-traditional asset classes like managed futures have been harder to observe in a record bull market with record low volatility.

In the next cycle, equity risk concentrated portfolios may be caught swimming naked when the tide goes out. It’s in that environment we will have the opportunity to showcase the benefits of balanced risk portfolios vs. traditional equity risk concentrated portfolios.

Beautiful Markets Turn Ugly

Given the substantial increases in negative global stock market momentum across the board combined with increased macroeconomic risks of the current corporate debt cycle, rising interest rates, China & oil, it might be time for investors to seriously consider doubling down on true diversification.

To be clear, it’s ALWAYS a prudent time to maintain a balanced portfolio.

Now it just might be a more prudent time.

Final Thoughts

If you are considering adding or removing exposure to managed futures from your portfolio, please don’t make a move without first reading this article on expected returns.

Article by LongBoard Funds

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