January 2017 Update
New Year Update
The Counterpoint Tactical Income Fund is currently in a risk-on position, invested in high-yield corporate credit. Morningstar ranked the Fund’s performance in the top 2% of 358 funds in the Nontraditional Bond fund category for the one year period ending 12/31/2016 base on total returns.
Markets have continued their realignment from early November through the New Year. The US presidential election results, actions by the Federal Reserve, and the recent OPEC meeting have combined to set a risk-on tone.
The BofA Merrill Lynch US High Yield Effective Yield is down near one year lows, hovering just below the 6% mark. Prices for high yield bonds have risen accordingly. We hadn’t seen levels below 6% since 2014, when speculative activity in biotechnology and US shale exploration were more in vogue. Risk appetite in the US credit markets thus appears healthy.
This enthusiasm is supported by action in crude oil, which ended the year at new highs amid news of an OPEC production cut.
This behavior all appears consistent with a market that expects inflation and economic growth. Benchmark Treasury yields begin 2017 just off one-year highs.
Consistent with expectations for growth and inflation, stocks are likewise near one-year highs. The post-election rally in US stocks has been propelled by investor enthusiasm for companies with weaker balance sheets and lower profitability.
Tactical Equity’s positioning with respect to market anomalies contributed to its performance. The following two comparison indexes show a simple stock selection algorithm based on the Altman Z-score, a measure of balance sheet health.
Companies with weaker balance sheets, shown in black, have outperformed the S&P 500 since the summer, extending their lead after the election. Counterpoint Tactical Equity’s strategy, meanwhile, focuses on companies with strong profitability and asset turnover ratios – measures that strongly correlate with balance sheet quality. Over the long run, “quality” strong balance sheet stocks typically have higher Sharpe ratios than weaker balance sheet stocks; Counterpoint Tactical Equity is designed to capture this effect.
In broader terms, recent enthusiasm across risk asset classes can easily continue. However, we are mindful of escalating economic tensions between the US and China, the prospect of fiscal intervention at home, and the Fed’s increased attention to inflation. Any one of these factors could prompt a rapid shift in positioning across asset classes.
The Federal Reserve, the leading global monetary force, has dominated global financial market narratives since the 2008 financial crisis. The overwhelming question for market participants over the past eight years has been what central banks would do next, and how markets would respond to those actions.
As 2016 drew to a close, however, new and equally potent factors emerged. Fiscal stimulus, largely unthinkable over the past decade, now appears likely. Global trade realignments, pivoting around the actions of the incoming Trump administration, further complicate the picture.
The incoming Trump administration’s plans overwhelmingly hinge on trade. Peter Navarro and Wilbur Ross, the likely key figures on the president-elect’s economic team, have forecast that economic growth driven by trade reform would provide $1.74 trillion of tax revenue offsets to Mr. Trump’s proposed $2.6 trillion in tax cuts. Trade is likewise the focus for promises of an acceleration in GDP growth beyond 5%. If achievable, those outcomes would justify some of the rising growth and inflation expectations that have lately been priced into US markets.
At the same time it’s important to consider a range of possibilities. Assuming that new trade proposals can make it through Congress, the US’s trade partners may respond in unpredictable ways. Critics of the Trump plan point to the possibility of a trade war and also allege flaws in Navarro and Ross’s account of the imports’ effect on GDP growth. Whatever the merits of the plan, it marks a dramatic reversal of a four-decade tendency toward increasing US trade deficits.
The Counterpoint Tactical Income Fund remains within striking distance of a pivot point. High yield credit holdings are trading near our stop-loss level.
Risk assets’ recent bullish behavior suggests that an acceleration of growth is a real possibility. It’s more difficult, yet equally important, to understand the chance of unanticipated disruptions. The mental exercise of anticipating financial market behavior has only become more intriguing in recent months. We nevertheless continue to rely on our disciplined trend-following model to signal appropriate action as we venture into the New Year.
Morningstar, Inc. All rights reserved. Morningstar is an independent provider of financial information. Morningstar performance rankings are based on total return without sales charge relative to all share classes of mutual funds with similar objectives and determined by Morningstar. Past performance or ranking is not indicative of future results.
Mutual Funds involve risk including the possible loss of principal. The use of leverage by the Fund or an
Underlying Fund, such as borrowing money to purchase securities or the use of derivatives, will indirectly cause the Fund to incur additional expenses and magnify the Fund’s gains or losses. Derivative instruments involve risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. There is a risk that issuers and counterparties will not make payments on securities and other investments held by the Fund, resulting in losses to the Fund.
Investors should carefully consider the investment objectives, risks, charges and expenses of the Counterpoint Tactical Income Fund. This and other important information about the Fund is contained in the prospectus, which can be obtained at www.counterpointmutualfunds.com or by calling 844-273-8637. The prospectus should be read carefully before investing. The Counterpoint Tactical Income Fund is distributed by Northern Lights Distributors, LLC member FINRA/SIPC.