Q3’2022 proved to be a very interesting quarter for the markets. Instead of falling into summer doldrums, the markets stayed very active. Early in the quarter, stocks continued the rally that started in the spring. That rally came to an end with the realization by the Fed that they needed to do more to fight a persistent inflation that was spreading across all the components of the CPI. In September, the Fed raised the Fed Funds rate by 0.75% for a third consecutive time to a range of 3-3.25%, the highest since 2008. Their action decimated global financial markets in a spectacular turnaround.

US stocks (S&P 500 Total Return Index) ended the quarter down 4.9%, US bonds (Bloomberg Barclay US Aggregate Bond Index) down 6.1%. Commodities (BCOM Index) were also off 3.1%. Even gold ended down over 9%. There weren’t many places to hide for investors owning traditional assets.

With both of its components down sharply, the 60/40 portfolio lost about 4.5% of its value during the quarter, bringing the total YTD loss to over 20%. (For simplicity, the 60/40 portfolio is simulated using ETFs: VTI – Vanguard Total Stock Market & BND – Vanguard Total Bond Market.)

Similarly, Harry Browne’s Permanent Portfolio, which is composed of equal weightings of stocks, bonds, gold and cash, lost over 5% for the quarter and almost 16% YTD. What’s interesting about the Permanent Portfolio is that it is now in its worst monthly drawdown since 1972 at almost 16%. The previous worst drawdown was just over 12.5%. (The Harry Browne Permanent Portfolio is simulated using ETFs: VTI – Vanguard Total Stock Market, TLT – iShares 20+ Year Treasury Bond, GLD – SPDR Gold Trust & BIL – SPDR Bloomberg Barclays 1-3 Mth T-Bill.)

While hedge funds had a mixed Q3 with the HFRX Equal Weighted Strategies Index ending the quarter up 0.5%, managed futures performed well: the SG CTA Index was up 4.1%.

What feels different this time is that central banks are causing the market slump in their efforts to fight off inflation, instead of responding to a slowdown of the economy that causes markets to form a V-shaped recovery. In short, the so-called “Fed put” is gone. This is causing both the stock market and the bond market to be under pressure and could remain so for a long period with the Fed juggling both sides of its dual mandate – as it fights inflation while maximizing employment. Additionally, this could result in sustained market volatility & global capital flows. Actively traded strategies, particularly managed futures, could continue to benefit from this environment. As such, there is a strong potential for managed futures’ performance to stay strong in the near to medium-term, and to provide the diversification they are known for to traditional portfolios like the 60/40 portfolio.

IMPORTANT DISCLAIMERS: The author’s point of view reflected in this article should not be construed as investment advice. The CTA strategies noted herein, some of which may be available on the Galaxy Plus platform, do not represent an endorsement of a particular CTA or strategy. The information presented is for illustrative purposes only and is based on the opinion of the author as a result of recent market conditions and does not represent the view of New Hyde Park Alternative Funds, LLC.

AN INVESTMENT IN ANY FUND IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK. THE PAST RESULTS OF A FUND AND/OR ITS TRADING ADVISOR ARE NOT INDICATIVE OF HOW SUCH FUND WILL PERFORM IN THE FUTURE.

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