Insight to the Matrix
What is it?
We use the Matrix to understand past and present performance of securities. This helps us to implement our plan of investing for the future. Here is a view of the Factors using our Matrix which is discussed in more detail in past Market Insights.
We analyze different factors that give us an idea of how investments in different areas are performing compared to one another. The factors include: the world stock index, a short term U.S. treasuries ETF, Gold, Oil, (two and ten year) U.S. Treasury Yields, a U.S. Dollar index, and the volatility of the S&P 500.
Why does it matter?
The markets are complex. However, we believe that tracking these factors helps us understand the many facets of the markets. It is important for us to understand them and how they impact the possible investment options for your portfolio. Below is a screenshot of the Matrix from last week.
As you can see, the U.S. Treasury yields and ETFs (2YR, BIL, and TNX) are either strong or overbought. UUP, the U.S. dollar index ETF is also strong along with Volatility (VIX). Strong volatility is typically regarded as a higher level of risk in the markets since they are moving more than when volatility is weaker.
In the neutral section is OIL, which had a negative switch in momentum as signified by the dark red fill around the white letters. It is close to being in the weak section and joining Gold and the world stock index (VT).
With the world stock market at the bottom of the matrix, we are not looking to add to equity exposure in most portfolios until things change. We may see a bounce from here into midterm elections but the current long term trend is still very weak. Along with that, the markets may be discounting a more hawkish Federal Reserve stance in their early November meeting. Unless conditions change, we will maintain a low allocation to stocks across our tactical models.
U.K. Prime Minister Resigned with Markets in Turmoil
What is it?
The Bank of England decided to step in and buy bonds in Britain’s bond market to alleviate a massive sell-off of government bonds.* If not done there would be increased risks for a recessionary move down along with lower investor confidence in the pension industry.*
“Liz Truss on Thursday said she would resign as British prime minister, brought down just six weeks into the job by an economic programme that roiled financial markets, pushed up living costs for voters and enraged much of her own party.”*
That happened not long after Boris Johnson Resigned from that same role.**
“The sell-off began after then-new finance minister Kwasi Kwarteng’s tax-cut announcement on Sept. 23. His replacement Jeremy Hunt on Monday scrapped ‘nearly all’ of Truss and Kwarteng’s economic plan and scaled back her vast energy support scheme, announced in September, in a historic U-turn to try restore investor confidence.”*
Why does it matter?
Investor confidence in capital markets is paramount to having them operate smoothly. If investors around the world lose confidence in the stability of markets a larger sell-off could occur if not stopped like this one was.
“The BoE interventions have highlighted a growing segment of Britain’s pensions sector – liability-driven investment.”*
“While such a rise in UK gilt yields was a rare event, regulators like the Bank of England will take a closer look to see if changes are needed to LDI, such as asking them to hold larger liquidity buffers to cope better with sudden shocks.”***
This is important to consider as interest rates continue to rise in the U.S. and around the world. If large firms are unable to pay for the liabilities they have, there could be a grim winter in the markets. We will see who can sustain the debts that they took on during the last few years and if the governments end up printing more money to add liquidity in a market that has been contracting as of late.
This may have been a wake-up call for countries around the world. The ability to maintain investor confidence in the markets is key. Depending on how the unknown outcomes of the future pan out, there could be a major shift in market sentiment and performance.
Other articles we found interesting this week:
Current 401(k) portfolio
Our last portfolio reallocation: 5/19/2022.
Want more information?
The weekly market insight provides a window into the process we use in our investment management process. At Breakaway, we believe markets are always changing and require a nimble yet data-oriented approach.
Our process attempts to identify trends and momentum in the financial markets. With that information, we align our clients’ portfolio accordingly in the hope to help our clients accomplish their life goals while attempting to lower the risk of a large drop in their portfolio.
*Reuters. “Truss and UK market turmoil: What you need to know”. 10/20/2022. Reuters. https://www.reuters.com/world/uk/britains-political-market-turmoil-2022-10-20/
**Rupert Steiner. “Boris Johnson Resigned. Turmoil Could Wipe 3% Off the U.K. Stock Market.”. 7/7/2022. Barron’s. https://www.barrons.com/articles/uk-prime-minister-boris-johnson-resignation-stock-market-british-pound-51657184230
***Huw Jones and Sinead Cruise. “Explainer: What is LDI? Liability-Driven Investment strategy explained”. 10/12/2022. Reuters. https://www.reuters.com/markets/europe/what-is-ldi-liability-driven-investment-strategy-explained-2022-10-04/
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