Wednesday (5/18) was a day of turmoil in equity markets with the S&P 500 down about 4% as investors sold risk assets for the safety of government bonds. I personally wouldn’t jump into bonds for the long term at this point, but yesterday investors needed to do something and bonds were the easiest choice. Markets have been concerned about inflation and are suddenly rethinking Fed chairmen Powell’s comments about how far the Fed is willing to go to fight inflation, which could mean interest rates are headed much higher.

It’s already been a very volatile year in markets, but at least some of the volatility has been on the upside, otherwise the damage could be even worse. Clearly inflation, and the Fed’s plan is to manage it, is still the biggest downside risk. The Fed admits to being behind the curve but I am not sure if they even saw the curve to begin with. To me, they backed themselves into a corner and now they can’t look back from getting inflation under control… so soft landing be dammed and get the Volcker Playbook out! The recent stimulus was the largest ever, and inflation is the hottest it has been since 1981. Therefore, by my logic, the situation will demand a policy response scaled to the size of the problem, and we should be prepared for creative and enormous Fed actions that will likely create a contraction at least if not a full-blown recession (with obviously negative ramification for financial markets).

We are already starting to hear spending changes and see some drawdowns in saving as gas prices rise. But consumers are accustomed to gas prices moving up and down in any given year and think of this as more “transitory”. Consumers, however, are not used to large fluctuations in things like household goods and groceries, and a glance at a recent shopping trip receipt can make the reality of higher prices hit home. These products don’t move as aggressively, and are not noticed as much, as the gas prices you see every week. Retailers like Target are feeling the pinch of higher prices that are now impacting sales. All of this is leading investors to rethink their exposure to stocks, and since more money flew into stocks last year then anytime over the last 19 years, even a small reduction in this flow can cause instability in the markets.

Because of the unique way Astor looks at economic data we picked up on these headwinds earlier this year even though 400k jobs were being added to the economy and GDP was accelerating. Our models suggested there maybe cracks in the economic data such as weakening purchasing manager indices and comparisons of recent trends to more normal long-term trends.

Hopefully, the economy and the markets will find support at a level not too far from our current juncture, and the anticipation will prove worse than the problem. With that said, we have already reduced our exposure to stocks by about 30% since the beginning of the year, and we retain the ability to reduce risk further or even enter into an inverse position, something we have not added to the portfolio in over a decade.

Stay tuned!

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The Dynamic Allocation Strategy seeks to achieve its objectives by investing in in Exchange-Traded Funds (“ETFs”). An ETF is a type of Investment Company which attempts to achieve a return similar to a set benchmark or index. The value of an ETF is dependent on the value of the underlying assets held. ETFs are subject to investment advisory and other expenses which results in a layering of fees for clients. As a result, your cost of investing in the Strategy will be higher than the cost of investing directly in ETFs and may be higher than securities with similar investment objectives. ETFs may trade for less than their net asset value. Although ETFs are exchanged traded, a lack of demand can prevent daily pricing and liquidity from being available. The Strategy can purchase ETFs with exposure to equities, fixed income, commodities, currencies, developed/emerging international markets, real estate, and specific sectors. The underlying investments of these ETFs will have different risks. Equity prices can fluctuate for a variety of reasons including market sentiment and economic conditions. The prices of small and mid-cap companies tend to be more volatile than those of larger, more established companies. It is important to note that bond prices move inversely with interest rates and fixed income ETFs can experience negative performance in a period of rising interest rates. High yield bonds are subject to higher risk of principal loss due to an increased chance of default. Commodity ETFs generally gain exposure through the use of futures which can have a substantial risk of loss due to leverage. Currencies can fluctuate with changing monetary policies, economic conditions, and other factors. International markets have risks due to currency valuations and political or economic events. Emerging markets typically have more risk than developed markets. Real estate investments can experience losses due to lower property prices, changes in interest rates, economic conditions, and other factors. Investments in specific sectors can experience greater levels of volatility than broad-based investments due to their narrower focus. The Strategy can also purchase unleveraged, inverse fixed income and equity ETFs. Inverse ETFs attempt to profit from the decline of an asset or asset class by seeking to track the opposite performance of the underlying benchmark or index. Inverse products attempt to achieve their stated objectives on a daily basis and can face additional risks due to this fact. The effect of compounding over a long period can cause a large dispersion between the ETF and the underlying benchmark or index. Inverse ETFs may lose money even when the benchmark or index performs as desired. Inverse ETFs have potential for significant loss and may not be suitable for all investors. Investors should carefully consider the investment objective.

The Astor Economic Index®: The Astor Economic Index® is a proprietary index created by Astor Investment Management LLC. It represents an aggregation of various economic data points. The Astor Economic Index® is designed to track the varying levels of growth within the U.S. economy by analyzing current trends against historical data. The Astor Economic Index® is not an investable product. The Astor Economic Index® should not be used as the sole determining factor for your investment decisions. The Index is based on retroactive data points and may be subject to hindsight bias. There is no guarantee the Index will produce the same results in the future. All conclusions are those of Astor and are subject to change. Astor Economic Index® is a registered trademark of Astor Investment Management LLC.


All information contained herein is for informational purposes only. This is not a solicitation to offer investment advice or services in any state where to do so would be unlawful. Analysis and research are provided for informational purposes only, not for trading or investing purposes. All opinions expressed are as of the date of publication and subject to change. Astor and its affiliates are not liable for the accuracy, usefulness or availability of any such information or liable for any trading or investing based on such information. Please refer to Astor’s Form ADV Part 2 for additional information regarding fees, risks and services.