Counterpoint Tactical Income and Tactical Equity November 2016 Fund Update

Election macro impacts

Markets have been working to price in the electoral results. The recent risk-on reaction seems to have resulted from an expected reduction in corporate tax rates and the proposition of a large fiscal stimulus in the U.S. We see some caveats.

Tax cuts pose a justifiable rationale for increased equity prices, all else equal. However, deficit hawks in the Republican Senate may curb the impact.  Similarly, we see Trump’s infrastructure/stimulus as a moderate positive. The headline figure of $1 trillion is likely to be parceled out over time, moderating the impact on GDP. The proposed implementation through private partnerships further clouds the expected results.

Finally, theory dictates that President-elect Trump’s stated affinity for protectionist trade policy will result in a long-run drag on growth. Until the administration provides more clarity the markets are going to have trouble pricing these developments in tax, fiscal and trade policy.

Uncertainty and volatility are likely to dominate

Given that President-elect Trump’s policy positions have shifted throughout the campaign, the overall direction of the new administration is more difficult to forecast than it may have been under previous presidencies.

We have looked for evidence that the market has priced in a wider range of possible economic outcomes, and have come up empty. If anything, price action in the gold market seems to indicate the market’s greater degree of certainty around improving economic conditions. This apparent mismatch between confidence and uncertainty gives us some concern that the current market enthusiasm may be fragile. Such concerns highlight the need for a tactical approach: Good news is never certain, and we are prepared to go risk-off should the model signal a shift.

Tactical Income positioning

The Counterpoint Tactical Income Fund has been invested in US high yield bonds since the beginning of March, 2016.  Two factors have lately put pressure on our holdings.

The first is crude oil. After OPEC built up expectations of production cuts and then failed to strike a deal, oil has remained range bound. Market participants appear comfortable with oil’s current trading range of $40 to$50, and more resilient balance sheets among oil producers has resulted in less of a shock to high yield bond and energy stock prices than we would have seen a year ago, given this price action.

The second and most significant factor is an adverse rise in market interest rates. The election result was one of misplaced market expectations. The new expectation of a combination of lower tax rates and aggressive deficit spending has injured bond prices. Yields on the 5-year Treasury have climbed about 40 basis points in a post-election reaction.  This has pared about 2% of value off any similar duration securities.

Meanwhile, high yield credit spreads, shown in the chart below, reflect a repricing of credit risk premiums as the possibility of a Trump win emerged in late October. As the election outcome became certain, the credit risk premium collapsed approximately 33 basis points between November 4th and November 9th.  This was supportive of fundamental high yield bond prices, as it almost equally offset the recent rise in interest rates. Since then, spreads have oscillated around this range, appear to be settling on the low side, agreeing with equities.

As the markets have re-evaluated growth and inflation risks this week, billions of dollars have flowed out of both high quality (LQD) and high yield (i.e. HYG and JNK) bond ETFs. Despite offsetting moves in interest rates and credit spreads, the price of the ETFs (i.e. HYG, in green pictured here) has strayed far from the fundamental value of its holdings (shows as the IBOXHY Index in blue fill).  As seen, the ETF has pierced through and bounced above its 200-day moving average (dark green dashed line), a technical-indicator followed by fundamental-indiscriminate trend-followers.

For fundamental U.S. high yield bonds to break their trend line in a meaningful way, interest rates must continue rising and/or credit spreads must begin rising. It must be noted that expectations of the Federal Reserve hiking Fed Funds rates in December are largely baked in with an 94% probability.  We believe a rate hike should not pose much if any market impact.

In brief, the market appears to be simultaneously processing several issues: ongoing adjustments in oil markets, the U.S. political administration change, and the approach of a widely used risk-off signal for trend followers. As these dynamics play out, Tactical Income may possibly experience a risk off signal in the near term. As we go forward amid a widening range of potential economic and market outcomes, we have as our foremost thought our key mandate – the successful management of downside risk.

Tactical Equity positioning

The Counterpoint Tactical Equity Fund remains in a risk-on posture and for now trades well above its moving average price signal. Although the broad market’s election-inspired rotation from large-cap to small and mid-capitalization stocks should support performance against large-cap peers, we anticipate market direction will largely determine performance outcomes for the remainder of the year.


Past performance is no guarantee of future results. There is no assurance the Funds will meet their stated objectives. Investors should carefully consider the investment objectives, risks, charges and expenses of the Counterpoint Tactical Equity Fund and Counterpoint Tactical Income Fund.

This and other important information about the Fund is contained in the prospectus, which can be obtained at or by calling 844-273-8637. The prospectus should be read carefully before investing. The Counterpoint Tactical Equity Fund and Counterpoint Tactical Income Fund are distributed by Northern Lights Distributors, LLC member FINRA/SIPC.