July 2023 – Rally continues and more jitters in those who have not yet bought in

For the month: 

 

Sigma Fund Real Return +1.14% (+14.31% YTD).

Sigma Fund Prudent Growth +1.49% (+24.28% YTD)

Sigma Fund Quality Stocks +1.98% (+26.53% YTD)

while the MSCI World ends up +2.45% in EUR, (+14.57% YTD in EUR).

 

Markets: 

July has been a month of continuity of June’s rally despite mixed economic data that starts to accuse the interest rate hike. The month started with the ISM Manufacturing PMI at 46 vs. 47.2 expected, in a clear zone of economic contraction, on the purchasing intention of industrial respondents. The market was encouraged by the employment data (unemployment at 3.6% in line with expectations) and services PMI 54.4 vs 54.1, in the economic expansion zone. As long as employment holds up and demand for services continues, recession will have to wait.

June inflation in the US, released on July 12, remained contained at 0.2% monthly for Core and total, 3.1% YoY for total CPI but we are comparing with the peak reached last year so it is not a reliable data yet. In the Euro zone, inflation came in at 5.5% annualized, in the UK at +7.9%. It is noticeable that in Europe we have been slower to raise rates and inflation is taking longer to ease.

Economic strength led the Fed to raise rates by 0.25% more at its July 26 meeting to 5.50%, a level not seen since January 2001. The European Central Bank followed with a 0.25% hike at its July 27 meeting to 4.25% and the deposit facility to 3.75%. To see such a level you have to go back to October 2008, when Europe still believed that the financial crisis was an American problem and that European banks were immune to the housing bubble.

To make a long story short, strong employment, strong services, still high inflation, rising rates and signs of slowdown in some sectors but not enough to make central banks change course. This could have been the Fed’s last hike and the ECB’s getting closer to terminal rate but all depends on the resilience of employment and services. Wages do start to hold back and that could help a soft landing, which is what we have for now.

Stock indexes very positive over the month, this time with strong recovery in small caps (Russell 2000 +6.06% vs Russell 1000 +3.19%). S&P 500 +3.77%, Nasdaq 100 +3.81%, Eurostoxx 50 +1.64%. Strong recovery of China FXI +11.88%, although still in a very fragile zone.

By factors, Big Cap Growth IWF +3.97%, Big Cap Value +3.52%, in Small Caps: Growth +4.69%, Value +7.41%. The Low Vol Equities factor lags further behind in the month (+0.73%). In the mid-rank, Quality +3.07%, Momentum +2.62%.

In American sectors: strong recovery in Regional Banks +19.25% and Oil & Gas Upstream +11.02%. On the bleak side Telecom, -5.25%.

 

Our funds:

Our shares (in local currency) of the Momentum strategy are up +0.28% for the month, the shares of the Growth strategy +2.51%, and those of the Quality strategy +3.06%.

The Tactical strategy, based on our risk thermometer, is up +3.15% for the month. The thermometer has remained in green light for investment over the period.

The Trend following system that we use in Real and Prudent for shorting has not been activated at any time. We continue with the structural minimum hedge in Prudent Growth that we started last month.

EUR/USD rose during the month +0.80%, which enabled us to take advantage of our hedging on USD in Real and Prudent Growth. In this trade we have developed a momentum strategy that will allow us to optimize entries and exits in EUR/USD futures to hedge USD risk tactically and only when we identify a sufficiently solid Euro uptrend. The EUR/USD has been in a downtrend since July 2008, with strong upward bounces only to fall back down afterwards. We will see if Fitch’s downgrade of the US long-term debt rating on August 1 (from AAA to AA+) is a longer-term trend reversal. With this strategy our USD shorts will hopefully become a net contributor to Real and Prudent’s performance. Quality does not currently include hedges of any kind but given the good performance of the strategies we have developed we expect to be able to include them in the coming months.

Looking ahead to the next few months, same message as last month, we expect some restraint on the upside and perhaps some pullback which will probably serve to call for buying from those still out of the market. But as usual, we will continue to rely more on our indicators and proven management strategies than trying to guess the future.