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September 2022 Investor Letter: The Bear is Very Much Alive

Updated: Nov 2, 2022

Market Summary

September was another tough month for equities. The Dow Jones tumbled 8.8% to end in a bear market, the S&P 500 fell 9.3% to close out its worst month since March 2020, and the Nasdaq lost 10.5%.

Market weakness was driven primarily by the actions of the Federal Reserve. In September, inflation increased more than expected, with PCE rising by 4.9% year-over-year and 0.6% month-over-month. The Fed’s Jerome Powell took a hawkish stance by projecting that the Fed Funds rate will hit 4.4% by the end of 2022, even if it causes a recession.

The Fed wants to increase unemployment in the US. As messed up as it sounds, the idea is that increased unemployment levels (along with slowing wage growth) could help tame inflation as families are forced to sharply cut back on spending.

The US Dollar surged, which will be a headwind for US companies. The British Pound dropped to $1.0382 during the month, which marked a record low for the currency. The Euro hit its lowest level vs. the dollar since 2002. A strong dollar has historically hurt the profits of US companies since so much of global trade is transacted in the currency.

alphaAI Summary

Since inception, all of our live strategies have continued to significantly outperform the S&P 500 on absolute and risk-adjusted bases. Our alpha levels remain positive across the board, which illustrates that the actions of our algorithms have contributed positively to our clients’ results. We have helped clients weather market volatility by keeping our portfolio volatility levels significantly lower than that of the S&P 500.

In September, Sigma, our moderate sector strategy, was down 7.9%, moderately outpacing the S&P 500, which lost 9.3%. Zeta, our moderate tax-optimized strategy was down 8.6%, also outperforming the S&P 500. Gamma, our moderate growth strategy fell 9.1%, moderately outpacing the CRSP US Large-Cap Growth Index, which lost 10.6%.

Portfolio highlights:

  • In September, our average market exposure was 83%, which helped to reduce drawdowns in our client portfolios. Stock valuations are approaching fair value, which could indicate that a bottom of some sort will be reached soon in the market. Looking forward, market exposure levels of 70%+ could help our clients realize gains from a potential bounce in equities prices.

  • Cash deposits made in September were not deployed into the market, which significantly reduced losses for clients.

What We’re Working On

You spoke, and we listened. We are working on a variety of new strategies, including strategies with conservative risk levels as well as strategies with aggressive risk levels. We also have a number of sophisticated strategies, such as capital preservation, short-only, and long-short, which will be announced soon. You can check these strategies out now on our website. Stay tuned for an official announcement!


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