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Markets in Motion - Back To The Future

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Markets in Motion - Back To The Future

 The story of Public Markets (stocks, bonds, and commodities) from the 3rd quarter of 2018 to about two weeks ago has been vicious short-term moves in asset classes, sectors, and factors exacerbated by hedging activities that created large vacuums in perceived liquidity. Most of these sharp moves have been “tweet-driven” or related to perceptions on monetary policy inconsistencies. 2019-09-24-chart-1The rest have been driven by “political” narratives, the largest being the US/China trade war, but there’s no shortage of other political market-movers, including BREXIT, Hong Kong protests, and of course a drone strike. That hostile attack on Saudi oil refining last week resulted in a panicked surge of the price of oil to nearly 20% to $72/barrel on Monday morning – the biggest one-day spike in history. While Brent oil prices retreated to the $64-$65 range by the end of the week, that’s still 7% over last Friday’s close.

What’s different NOW, in September 2019, is that there are fundamental data shifts behind the other recent remarkably quick asset class sell-off. Exhibit #1 for this narrative was a route in bonds, where longer-dated US Treasury Yields posted their most significant weekly advance in more than six years. The fundamental reason was something that only veteran investors have experienced (yes this makes me feel old) and that’s inflation. Core CPI showed its third consecutive increase of 0.3%, the first time in nearly 25 years. This data point virtually ensured the end to the talk of a 50-basis point (bps) cut for the Fed’s September meeting (and indeed the cut was only 25 bps). Political volatility has once again intervened, and yields moved up again and made fresh highs in response to news that Trump administration officials were considering an interim China deal to delay tariffs.

2019-09-24-chart-2This has led us to remain cautious with our overall risk and duration exposure, and the data is clearly showing that our House View of equities and near cash is the right call. But there may be opportunities to increase risk ahead if in fact we are beginning to cycle into a more inflationary environment that very few professional investors have experienced. It’s a future we understand, and we will be prepared. The key takeaway is that our Global Tactical strategies will adapt to changes and seek to preserve capital in risk downturns. With this month’s positioning, we are cautious over the short-term. We exited our position in European Financials and US Midstream MLPs. The September ECB/APP decision has to be pro-growth, or EU equities could take a leg down. We are cautious on oil given that major producers like Saudi, Russia, Iran, etc. need high prices, but can’t lower production because of fiscal/policy woes.

2019-09-24-chart-3

Recent Portfolio Changes

  • We exited our positions in European Financials and Energy MLPs in favor of Cash Equivalents. We used a sharp market rotation into “value” to exit both positions heading into the September Fed Policy decision.

Portfolio Changes
Since June 1, 20191

Cash We initiated a position in cash. As risks persist across asset classes and with 1-3 month treasury yields near 2% … an elevated position will help shield the portfolio from volatility.

Fixed Income (US)

We continue to be overweight in our position to Ultrashort Maturity Bond. Huge moves in interest rates have left government bonds at extremely overbought levels, reflecting a very bearish view of economic growth. We continue to see duration as a risk and favor ultrashort duration at the expense of allocations to long-dated fixed income.

We maintain our position in Preferred Stocks. We remain convicted in our position. The asset class provides attractive yield and portfolio diversification.

Fixed Income (International)

We increased our position in Emerging Market Bonds. Emerging market bonds’ attractive yield and positive tailwinds will continue to provide diversification benefits to the portfolio.

Equity (US)

We maintain positions in Quality and Momentum Factor equities. We continued to consolidate exposure in our US equity book to focus on late-cycle factors and secular themes. Quality equities possess pricing power, exhibit strong profitability, and have additional sustainable competitive advantages which allow businesses to remain viable over time. We feel this holding is prudent in the later stages of the US credit cycle. Over the shorter term, Momentum equities should outperform as economic growth re-accelerates in the second half of 2019 and trends persist.

Equity (International)

We maintain a reduced position in Emerging Market equities. The most important risk to emerging markets (a big Chinese growth slowdown or collapse in its currency) is unlikely but has increased on the margin. We have reduced emerging market equity exposure. We are still watching the effects the trade war with China could have on Asia.

Alternatives

We maintain a position in Gold. We added the precious metal as a hedge against volatility. When risk assets are trading lower, gold holds value relative to other asset classes.

 


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Please do not hesitate to contact us with any questions!
Best regards,

John A. Forlines III

Co-Chief Investment Officer

Robert Shea

Co-Chief Investment Officer


1Information as of 9/10/2019. Individual account allocations may differ slightly from model allocations.
2Some Emerging Markets allocation overlaps with regional allocations.
3Excludes GTA’s alternative, cash, and cash equivalent positions.
4Contains international exposure

Past performance is no guarantee of future results. The material contained herein as well as any attachments is not an offer or solicitation for the purchase or sale of any financial instrument. It is presented only to provide information on investment strategies, opportunities and, on occasion, summary reviews on various portfolio performances. Returns can vary dramatically in separately managed accounts as such factors as point of entry, style range, and varying execution costs at different broker/dealers can play a role. The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be and should not be interpreted as recommendations to purchase or sell such securities. Forecasts are inherently limited and should not be relied upon as an indicator of future results. There is no guarantee that these investment strategies will work under all market conditions, and each advisor should evaluate their ability to invest client funds for the long-term, especially during periods of downturn in the market. Some products/services may not be offered at certain broker/dealer firms.

The investment descriptions and other information contained in this Markets in Motion are based on data calculated by W.E. Donoghue & Co., LLC (W.E. Donoghue) and other sources including Morningstar Direct. This summary does not constitute an offer to sell or a solicitation of an offer to buy any securities and may not be relied upon in connection with any offer or sale of securities. This report should be read in conjunction with W.E. Donoghue’s Form ADV Part 2A and Client Service Agreement, all of which should be requested and carefully reviewed prior to investing. The Global Tactical Allocation Composite (“Composite”) was created on July 1, 2009.

The Global Tactical Conservative Composite (“Composite”) was created on February 1, 2014. The Global Tactical Income Composite (“Composite”) was created on February 1, 2014. The Global Tactical Growth Composite (“Composite”) was created on February 1, 2015. W.E. Donoghue acquired 100% of the assets of JAForlines Global on December 29, 2017.

Composite returns are calculated gross of investment management fees, net of investment trading expenses, and underlying fund costs but do not reflect the effect of income taxes on the investment returns. Actual performance results will be reduced by fees including, but not limited to, investment management fees and other costs such as custodial, reporting, evaluation and advisory services. Performance reflects the reinvestment of dividends, income, and capital appreciation. Composite returns are calculated monthly, which are described in greater detail in the firm’s Form ADV Part 2A, using the time-weighted total rate of return methodology. Monthly returns are geometrically linked to calculate quarterly and annual returns. As fees are deducted quarterly, the compounding effect will be to increase or decrease their impact by an amount directly related to gross portfolio performance, and dependent on direction, magnitude, and order of returns. For example, on a portfolio with a 2% annual fee, if gross performance is 10%, and performance is equally distributed across all four quarters, the compounding effect of the fees will result in a net annual performance of 7.81%. No leverage, derivatives, or shorts are used. Past performance is not indicative of future results.

There can be no assurance that the purchase of the securities in this portfolio will be profitable, either individually or in the aggregate, or that such purchases will be more profitable than alternative investments. Investment in any Global Tactical Portfolio, or any other investment or investment strategy involves risk, including the loss of principal; and there is no guarantee that investment in W.E. Donoghue’s Portfolios or any other investment strategy will be profitable for a client’s or prospective client’s portfolio. Investments in W.E. Donoghue’s Portfolios, or any other investment or investment strategy, are not deposits of a bank, savings, and loan or credit union; are not issued by, guaranteed by, or obligations of a bank, savings, and loan, or credit union; and are not insured or guaranteed by the FDIC, SIPC, NCUSIF or any other agency. The composite strategy provides diversified exposure to various asset classes such as equities, fixed income, and alternatives utilizing liquid exchange-traded products. Diversification does not guarantee a profit or protect against a loss.

The Blended Benchmark Moderate is a benchmark comprised of 50% MSCI ACWI, 40% Bloomberg Barclays Global Aggregate, and 10% S&P GSCI, rebalanced monthly.

The Blended Benchmark Conservative is a benchmark comprised of 35% MSCI ACWI, 55% Bloomberg Barclays Global Aggregate, and 10% S&P GSCI, rebalanced monthly.

The Blended Benchmark Growth is a benchmark comprised of 65% MSCI ACWI, 25% Bloomberg Barclays Global Aggregate, and 10% S&P GSCI, rebalanced monthly.

The Blended Benchmark Income is a benchmark comprised of 80% Barclay’s Global Aggregate Bond Index, 10% MSCI ACWI, and 10% S&P GSCI rebalanced monthly.

The MSCI ACWI Index is a free float adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. The Bloomberg Barclays Global Aggregate Bond Index measures the performance of global investment-grade fixed-rate debt markets, including the U.S. Aggregate, the Pan-European Aggregate, the Asian-Pacific Aggregate, Global Treasury, Eurodollar, Euro-Yen, Canadian, and Investment Grade 144A index-eligible securities. The S&P GSCI® Index is a composite index of commodity sector returns representing an unleveraged, long-only investment in commodity futures that is broadly diversified across the spectrum of commodities.

The blended benchmark returns are calculated on a fully collateralized basis with full reinvestment. The returns do not include fees or expenses that are associated with managed accounts. You cannot invest directly in an index. A more detailed description of the benchmark's constituents is available upon request.

The information contained in this presentation related to JAForlines represents the strategies and performance achieved prior to the acquisition.

W.E. Donoghue & Co., LLC is a registered investment advisor with the United States Securities and Exchange Commission in accordance with the Investment Advisors Act of 1940.

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