Markets Are Hoping and We Are Hedging
November 11, 2022
Yesterday, the S&P500 had its strongest day of the year in 2022, rallying 5.5% on the back of a better-than expected inflation result. The financial media is now widely reporting that the chances of a “soft landing” for the economy have increased. This drove our portfolios higher yesterday and is an incrementally positive development.
While incrementally positive, the economic data more broadly is yet to convince us that a soft landing is the most likely outcome. There are still a number of risks facing the economy and markets today. We remain invested in high quality companies that are set to benefit from any recovery upside. We also traded another hedged note to minimize downside risk.
Inflation Update and Market Reaction:
October’s rate of inflation as measured by CPI came in at 7.7%, which was lower than expectations.
The equity market responded with a strong rally (+5.5% yesterday) that was broad based and led by companies in the technology sector.
The slowdown in inflation was driven by price declines for medical care services (-0.6%), used vehicles (-2.4%) and apparel (-0.7%).
Shelter costs grew 6.9% year on year (highest since 1982), while food inflation grew 10.9% year on year.
At 7.7%, inflation remains high and well above the fed’s 2% target. Our base case for the December meeting is a 50-basis point rise – futures are reflecting this with an 80% probability.
GoalVest view and portfolio positioning
We welcome any increased chance of a soft landing, which is broadly positive for asset prices and would continue to drive returns for our portfolios.
We remain invested in a portfolio of high-quality companies that are benefiting from recovery upside.
Inflation is still high at 7.7% and this year we have seen the most aggressive interest rate increases in decades. The impact of these interest rate increases is yet to be fully realized as there is a lag between the implementation of monetary policy and its effect on consumers and the economy.
Until we have a clearer indication that the federal reserve will be able to ease policy and that a soft landing is the most likely outcome, we believe that it is prudent to maintain portfolio hedges to minimize downside risk.
After generating a return within the upside cap on hedged note 48133GL84, we rolled the proceeds into a new absolute note last week.
Key terms for the note are below:
Term: 9 months
Underlying: S&P500
Hard principal protection: 15%
Upside cap: 8.6%
Issuing Bank: TD
As a reminder, hard principal protection means that if the underlying index falls, the note will perform better than the underlying index no matter how far it falls. For example, if the S&P500 is down 14% at maturity, the note will be up 14%. If the S&P500 is down 30% at maturity, the note will be down 15%.
*Different investors have different circumstances and in select instances, some investors may not see this note in their portfolio.
We continue to closely monitor economic data and optimize our portfolio positioning as necessary. The next CPI reading is a day before the fed’s December meeting, and we will be watching closely for signals.
Disclaimer
The information presented should not be considered personalized investment, financial, legal, or tax advice. This notification is not an offer to buy or sell, or a solicitation of any offer to buy or sell, any of the securities mentioned herein. Certain statements contained herein may constitute projections, forecasts, and other forward-looking statements, and are based primarily on assumptions applied to certain historical financial information. Certain information has been provided by third-party sources, and although believed to be reliable, it has not been independently verified, and its accuracy or completeness cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this document and are subject to change. Past performance is not indicative of future performance. Principal value and investment return will fluctuate. There are no implied guarantees or assurances that the target returns will be achieved, or objectives will be met. Future returns may differ significantly from past returns due to many different factors. Investments involve risk and the possibility of loss of principal. The values and performance numbers represented in this report reflect management fees. The values used in this report were obtained from sources believed to be reliable. Performance numbers were calculated by Black Diamond using the data provided by your custodian. Please consult your custodial statements for an official record of value.
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