In July the fears that had been building up during the last few days of June surfaced. The best performing sectors corrected sharply, while laggards recovered slightly. Our funds also corrected the excesses that had been building up recently.

Altex Tactical, down -0.08%, held up the best this month. Sector rotation did not significantly impact overall market risk, and volatility in the S&P 500 remained under control. Altex Momentum, down -6.66%, offset some of the losses in technology and metals with gains in the healthcare sector. Altex Quality, down -12.62%, fell the most due to its exposure to trending sectors among large-cap companies – the segment that corrected the most during the month. Altex Growth, down -8.74%, outperformed Quality, thanks to its lower exposure to technology and higher exposure to healthcare. Since it invests in mid-cap companies, the extremities of sector concentration are not as pronounced.

Despite this correction, YTD results remain positive: Altex Growth +17%, Altex Quality +12.7%, Altex Tactical +4.42%, and Altex Momentum -2.60%.

The Altex DIPS hedging strategy had a negative impact this month: between -0.75% and -1.12%, depending on the fund. Index correction was more contained than for trend-driven sectors.

The USD depreciated by -0.93% against the EUR. The hedging strategy remained flat for the month, while the USD dragged on MTD returns.

Markets:

In July, three factors weighed on market valuations:

• The corporate earnings season far exceeded analysts’ expectations, although some announcements generated concerns, such as those made by the mega-caps that are most exposed to AI investment, that unsettled the tech sector. Among others, Meta announced it is developing an AI chip and suggested this might translate into an excess computing capacity, which weighed on the semiconductor sector.
• Oil prices soared pushed by the lack of clarity and commitment to a final ceasefire in the Middle East and the reopening of the Strait of Hormuz, significantly impacting inflation, that could rise again.
• The U.S. Federal Reserve, led by Kevin Warsh, did not raise interest rates nor did it offer any clues as to how or when it would take inflation control measures. The Fed’s timing for reassessing monetary policy triggered fears about the risks of inflation if it acts too late. The U.S. bond yield curve’s reaction was to send long-term yields soaring to near five-year highs. The lack of confidence in U.S. debt weighed on growth stocks.

Despite the increase in perceived risk, the impact on markets was very scattered, and concentrated mostly in sectors that had previously outperformed indices. The S&P 500 closed flat, down -0.13%, and the Nasdaq 100 posted a fall of -6.61%, after recovering from an intraday low of -10%. The Dow Jones Industrial and the MSCI World were up +0.3%.

Small-cap companies lagged behind large-caps: the S&P Top 50 was up +0.50% while the S&P 600 was down -1.29%, and the Russell 2000 was down -2.6%. Despite this difference, the dispersion among indices was not particularly high.

The greatest divergence was across sectors: Oil & Gas Exploration and Energy soared, up +15% and +12% respectively, closely followed by the Financial sector, up +6.2%, buoyed by the economy’s resilience and expectations of extended higher interest rates. On the downside were Semiconductors (-17.6%), Artificial Intelligence (CHAT) (-17%), Homebuilders (-10%), Telecommunications (-8.5%), and Technology (-8%). It was a month of reversal for the best YTD performers.

By factor, Growth underperformed Value, both among large-cap and small-cap companies (a 6% difference for large-caps and 5% for small-caps). The Momentum factor for large-cap companies fell -4.20%, contrasting with the +3.74% gain for the Value Big Caps factor. The spread narrowed slightly in the last two days of the month.

Outside the U.S., China had a strong month, rising +15% and lowering its year-to-date losses to -4%. Brazil also rebounded on the back of oil prices, and gained +6.2%, while the rest of the markets fluctuated between +1.5% and -1%, with little volatility throughout the month.

In commodities, Oil took center stage, with Brent up +29%. Agricultural commodities also followed suit, with Wheat and Corn up +8.5% and +5.7%. Metals were relatively flat, although Copper did rebound by +5%.

Outlook & Positioning:

This period of the year typically brings more abrupt corrections and recoveries as a result of portfolio rebalancing and lower liquidity during the summer months. Markets tend to move sideways throughout September and October, in spite of the strong sector rotation and momentum shifts that occasionally happen. As midterm elections approach, announcements and other news could continue to affect the bond yield curve. Lack of prudence and financial discipline by governments and corporations – the former making large investments in defense and the latter in artificial intelligence – give rise to significant risks. The race to capture the liquidity markets can provide continues while the Fed would like to be more restrictive than it currently is. This results in a gradual loss of confidence in U.S. debt and portfolio repositioning focused on a sectoral rotation, rather than between equity and fixed-income assets.

We had already significantly reduced our exposure to Metals in the previous quarter, although we maintained a substantial exposure to Technology and Industrials. We also increased our exposure to the Healthcare sector. This positioning made us underperform in July, but we view this correction as an adjustment to the excess momentum in certain sectors and believe the secular trend remains intact. We began July with slightly more cash on hand than in other months, which we have used to reinvest following sharp declines in some companies that continue to deliver very strong results. For now, we are maintaining a similar portfolio structure and will monitor developments in August to readjust positions in line with our portfolio construction and rebalancing process.