3Q 2021 REVIEW

Over the summer we had grown increasingly concerned about emerging risks to both stocks and bonds. Such concern led to a proactive re-positioning of your portfolio as we entered September, enabling us to sidestep the ensuing selloff and end the quarter on a positive note. We continue to maintain a defensive posture, for now.

As stocks earlier this year continued to grind higher, divergences were developing that strongly suggested a market re-set was coming. The stark contraction in breadth and participation showed fewer and fewer stocks maintaining uptrends as the year wore on, while the mega-cap names continued to perform well. When the infantry leaves the field and only the generals are left to fight, the battle is often lost.

Investor complacency has continued to rise since the pandemic low in March 2020. Such is the result of government intervention in markets going back to the depths of the financial crisis in 2009. Since March 2020 the Federal Reserve has added over $5 trillion in “liquidity” that has found its way into every asset class – stocks, bonds, and real estate. Central Banks have left markets hooked on an opium drip of free money (see “The Only Chart That Matters”).

Market history is filled with periods of calm followed by commensurate periods of volatility. The chart below captures this dynamic over the last five years. There is always ‘something’ that catalyzes a regime change, yet we often can’t identify that ‘something’ until after the fact.

Our analytical focus on empirical data from market behavior and sentiment helps in providing a good context for viewing these moves.

We are currently in the enviable position of being flush with cash to re-deploy as more favorable conditions appear. Safety of capital remains our top priority, and we strive to attain solid returns with low volatility through an adaptive management process that assumes nothing.