Market Update and Managed Risk Leap Roll Up

Market Update and Managed Risk Leap Roll Up
August 9, 2022 phillip_toews_1p9l0e9h

Today at the close, we moved the last of our International Developed Stock positions back to a fully invested posture. With this trade, we are now in a fully bullish posture across our equities and high yield bonds allocations.

Time Sensitive Note regarding our Managed Risk Blueprint Strategy

Last week’s system parameters were in the level for us to roll up our LEAP strike price to near the market for our S&P 500 equity exposure in Managed Risk Blueprint. That means that, with the higher strike price, we are potentially better able to hold gains and bolster against losses should markets again turn lower.

For advisors who were contemplating allocating to hedging strategies to their portfolios after the recent rally, now might be an opportune moment to do so.

Market Environment

Momentum for the recent rally surged with Powell’s “neutral” comment in late July. It’s hard to understand the neutral comment, considering the state of inflation, employment, and likely rate increases over the next 6 months. Our view is that the neutral comment will later be regarded as a mistake.

A talk of peak inflation is misguided and frames the issue of inflation incorrectly. Inflation doesn’t normally surge briefly and then subside. In the US, it has lasted for between 4 and 9 years typically. Cumulative inflation should be the focus, which likely will exceed 20% or higher over three years, and may play out as waves higher and lower, rather than one peak.

Rallying risk assets hurts the FEDS efforts to tame inflation as it aids investor/consumer sentiment and creates more wealth to continue to push demand and employment. And that’s the problem. The FED has an implicit (some would even say explicit) need to lower economic activity if inflation remains high.
This rally is an awesome opportunity to attempt to de-risk. If you were contemplating doing that when stocks were down 25%, you really want to do it when they’re down just 15%.

Use rallies to allocate into hedged equity strategies, and move out of conventional fixed income positions into the unconstrained bond strategies, which are generally constructed to attempt to get out of the way of bond principal losses

We’ll keep you updated as our models react to market moves.

Toews Management Team

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