Despite the series of earthquakes that sent many investors around the globe into a state of panic, the series of macro indicators we use to analyze and measure the level of risk to forward asset returns, remained green. As a result, we were able to use the pullback in the stock market to build up positions in some of our favorite companies at fire sale prices.
By relying on actual quantitative data and not listening to the noise and headlines, the investment team at LPAM was able to increase the offensive positioning of client portfolios to benefit from an expected resumption of rising stock prices. The contrarian moves to increase exposure to favored stocks as panic spread allowed us to maintain and then widen our performance gap against the S&P 500 as the selloff deepened and then reversed.
The tables and charts below illustrate our flagship strategy performance, which exited the market correction +34.67%, amounting +1,021 basis points of outperformance after fees.
The core reason we can ignore the noise of pundits, news outlets and headlines, is that our investment process is based on series of quantitative and fundamental factors that measure the markets health under the hood, away from the noise of the 24-hour news cycle, both at the market level and at the individual security level.
Going forward, despite the recent market bounce, our indicators suggest further gains for U.S. stocks. This outlook is based on but not limited to the following pillars of market support;
- U.S. macro-economic conditions continue to improve
- Corporate earnings growth is accelerating, and equity valuations are reasonable
- Economically sensitive stocks are outperforming recession proof stocks
- Stock market breadth is wide and robust (most stocks are participating in the rally)
- Credit markets and banking conditions are healthy
Most investors don’t pay attention to the wider measure of unemployment called the U-6 unemployment rate, which includes the long term unemployed as well as part time workers. The reality is that the labor force participation rate in the U.S. is still near historic lows. As the pool of qualified workers continues to shrink, employers are turning to the long term unemployed to fill their labor needs. As less skilled workers enter the work force, its serving as a moderating force on labor market inflation.
More importantly, we entered the recent correction with all our internal risk indicators improving. As tactical managers of client capital, it’s just as important to know when to be “tactically patient” vs. “tactically active”. When markets enter short but violent downturns such as the one in February against a backdrop of improving economic and corporate earnings data, its pays and creates more value for clients to either do nothing or add to favored investment positions.
