January’s market volatility continued through the first half of February as fears surrounding oil, China and US economic growth dominated the psyche of investors. However, improving economic data from America plus provocative and suggestive talk from oil producing countries combined to cause stocks to “V-rip” higher during the second half, creating a sense of calm to the casual monthly observer. Amidst this storm, each of the two funds at Forge First generated respectable profits during February 2016.
Wow, wasn’t January a fun month! In my previous commentary, I tabled three potential scenarios for stocks during 2016. My pessimistic scenario saw oil prices staying lower for longer, the duration of which was positively correlated to the rising risk of a market meltdown driven by a heightened probability of a liquidity crisis. I placed a 30% chance of this scenario unfolding, but I didn’t think it would happen during the first two and a half weeks of 2016. Fortunately, we entered January with conservative gross and net exposure positioning, so our funds suffered only modest losses for the month.
True hedge funds proved their worth during 2015, and unless oil producing nations back off from their game of chicken, the value of running a hedged book will only increase in 2016. Markets are running out of good news bullets, hence risks are rising. The longer oil prices remain below $50, the higher the probability that a non-bank financial company or country dependent upon commodity prices catalyzes a negative event for stocks and further flattens the yield curve. In contrast, should markets anticipate $60 plus oil towards the end of 2016, equities will see vicious sector rotation that only the nimblest of managers will be able to capitalize upon. Want to place your bet on where markets go? Not me! While my team has put together a repositioning “play list” for our funds for when the world begins to “reflate”, entering 2016 we’re positioned for defence after delivering a strong year on the offence side of the ledger.
The circular argument being driven by the monetary policy musical chairs continued this week after Draghi failed to “beat expectations”. This logic suggests the late week rally in the € trims Europe’s outlook for growth, necessitating further QE which in turn drives up the USD and causes the FOMC to remain “dovish”. Keeping pace with this bouncing ball causes dizziness to the market follower while North American markets just plain gave up, finishing November either side of flat, amidst an increasing number of disturbing signals.