The first half of 2023 delivered plenty of positive surprises for investors. For starters, while Wall Street analysts were predicting a down year for stocks for the first time in decades, the equity market had one its strongest first halves on record with the S&P 500 TR Index finishing up almost 17%, partially fueled by an earnings recovery. Also providing buoyancy for risk assets, the recession that was widely expected to start during the half never materialized, while inflation moderated with the CPI falling from 9.2% in June 2022 to 4% in May. The unemployment rate fell to a 54-year low in April, matching the May 1969 level. Looking at the performance of the equity markets, one would never suspect that a run-on-the-bank happened during this first half. Of course, pundits will point out the fact that the stock market is up largely due to the performance of a very narrow basket of technology stocks, driven by the emergence of a new mega force, with AI presenting a potential structural shift.
Even more surprising was the pullback in market volatility, with the VIX index making a new low at 12.7% in June, a level not seen since before the Pandemic. Similarly, volatility indices for fixed-income, foreign exchange and commodities all traded to the bottom of their 1-year range, as evidenced by the CME CVOL indices, except for agricultural commodities, which volatility remains at the mercy of the Ukraine War. It is interesting to note that while close-to-close volatility is very low, anecdotally, intraday market volatility is reported as being high.
The physical commodity sector continued to struggle, with the S&P GSCI TR Index down 7.5%, helping the moderation of inflationary forces.
In the past, we’ve mentioned the four scenarios which looked probable at the beginning of the year:
• The “soft-landing” which the Fed is looking to engineer;
• A “hard landing” which would quickly bring a recession;
• “Stagflation” where inflation is persistent and causes the Fed to keep rates elevated at the cost of economic growth;
• The Fed tolerates higher inflation for a while so as to not sacrifice growth and full employment.
With inflation moderating, it now appears that the Fed’s FOMC could be successfully engineering the “soft-landing” scenario, giving them the option to take a pause in their aggressive interest rate hike cycle. However, Fed authorities have been voicing their higher-for-longer stance which is reflected in the Fed Dot Plot showing a current consensus of the Fed Fund Rate topping out this year around 5.625% before starting to ease next year.
The second quarter of 2023 proved to be favorable for CTAs (SG CTA Index up 5.4%), allowing them to recover from a difficult first quarter (SG CTA Index down 5%) to finish the first half up 0.2%. Short-term traders mostly struggled in a falling volatility environment, with the SG STTI finishing the first half down 3.35%.
Looking toward the second half of the year, it seems a lot of uncertainty remains:
• On the macro-economic front, will the global monetary authorities tame inflation, or will it remain persistent for a while longer forcing the Fed Dot Plot to adjust for higher rates?
• On the geopolitical front, will stability improve, or will a fragmenting world move toward deglobalization?
In this context, it would appear prudent to stay vigilant, and while it may be tempting to continue running with the winners, rebalancing a well-diversified portfolio of risk assets and risk-mitigating strategies like macro and CTA strategies may help navigate the current uncertainty and mitigate any potential resurgence of volatility.
IMPORTANT DISCLAIMERS: The author’s point of view reflected in this article should not be construed as investment advice. The CTA strategies noted herein, some of which may be available on the Galaxy Plus platform, do not represent an endorsement of a particular CTA or strategy. The information presented is for illustrative purposes only and is based on the opinion of the author as a result of recent market conditions and does not represent the view of New Hyde Park Alternative Funds, LLC.
AN INVESTMENT IN ANY FUND IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK. THE PAST RESULTS OF A FUND AND/OR ITS TRADING ADVISOR ARE NOT INDICATIVE OF HOW SUCH FUND WILL PERFORM IN THE FUTURE.