Market Recap
The S&P 500 fell 1.28% in June, bringing its year-to-date return to 9.51%. Emerging markets, represented by the EEM ETF, continued to trade in a volatile range, finishing the month down 0.28% and yet higher by 25.04% year-to-date.
Small capitalization U.S. stocks performed well through June, with the IJR ETF up 6.96% and now 23.41% year-to-date. These smaller companies appear to be breaking out of a long-term channel, signaling potential for a period of outperformance relative to the large-cap U.S. companies that have dominated for so long.
Portfolio Notes
Our positioning in emerging markets and more recently small-cap U.S. stocks is no coincidence. Momentum is shifting on the global equity stage, and for the first time in decades it appears that large-cap U.S. stocks could take a longer-term backseat.
We’re also witnessing a pivotal moment for the broader macro picture. Inflation, interest rates, and the U.S. dollar are all sitting at key levels, and our crystal ball isn’t giving us a clear reading on which direction they’ll go from here. Times like this are a good reminder of why we utilize an active, systematic approach.
On a scale of portfolio management styles from static buy and hold to actively trading every move, our approach lands somewhere in the middle. We track a wide range of asset classes and markets with momentum and trend filters, aiming to participate in long-term trends without bias or emotion.
The value of long-term momentum-based investing is that it is robust. Similar to buy and hold investing, you don’t have to get the day to day or even month to month fluctuations right all the time but unlike buy and hold, you also have a system in place that adjusts positioning when price-based evidence signals a real macro shift. Additionally, a momentum-based portfolio has a built-in risk management system to help shield from large losses.
Chart of the Month
Revisiting one of our favorite ratio charts, emerging markets versus the S&P 500, we can see a continuation of the early trend we first highlighted last year. When the chart is rising, emerging markets are outperforming the S&P 500, and vice versa. After a long 15-year downtrend of emerging market performance relative to the S&P 500, the chart is attempting to form a bottom. The 200-day moving average is crossing up through the 200-week moving average, sometimes considered to be a long-term bullish signal. Additionally, we are in good company. Stanley Druckenmiller has been vocal about emerging markets, particularly Brazil, for many of the same reasons as us: rising inflation, a commodity super cycle, and the potential for a weaker US dollar. EWZ, a large to mid-capitalization Brazil equity ETF is currently in his top 10 holdings.
