May 2022 Investor Letter: More of the Same
May was another volatile month, with the S&P 500, Dow, and Nasdaq all bottoming on May 20th. The S&P 500 hit bear market territory in May, but has since rallied to close the month flat. Since January of this year, the S&P 500 has had six separate rallies of 3%+, five of which have failed. It remains to be seen whether the current rally will be a real move or just another bear-market bounce.
The latest rally has been more of a relief rally than anything, partially driven by marginally improving inflation numbers. Although, inflation still remains red hot with the latest CPI reading coming in at 8.3%. The Fed’s monetary tightening policy is still the dominating narrative in the markets. As expected, a 50bps hike was announced in May with another 50bps hike expected in June. Investors continue to grapple with “how far and how fast” hikes will go as the Fed continues to battle inflation. The Fed is also expected to begin its $8.9 trillion balance sheet runoff in June.
During May, the Eta strategy was down 1.8%, moderately lagging the S&P 500, which was flat. The primary driver between the difference in performance was due to Eta reducing exposure to an average of ~28% during the last four trading days of the month, which caused us to partially miss out on a ~5% relief rally in the S&P 500. However, the exposure reduction was prudent as the S&P 500 has since lost 1.5% through June 1st, with additional market weakness likely to come. Our average exposure in May was 50%, which illustrates that the AI system continues to focus on risk reduction and on limiting drawdowns. Year to date, Eta has lost 7.9%, significantly outperforming the S&P 500, which has lost 13.3%.
Looking forward, we continue to expect general market volatility and weakness as the Fed continues to walk the tightrope that is monetary tightening. The Fed desperately wants to control inflation, but, at the same time, also prevent a recession. It can be easy to gain a false sense of security from the recent rally in the S&P 500, however, it remains to be seen whether it actually has legs in it. Our AI system continues to take a cautious approach as times remain uncertain.
