After the rally of the second half of March, markets fell throughout April leaving the Nasdaq 100 (the worst performing index) at -13.26% and the S&P 500 at -8.8%. SFRR reports month end returns of -5.53% (-20.89% YTD), SFPG posts returns of -8.47% (-26.51% YTD), and SFQS ends the month at -7.05% (-18.16% YTD).
Due to the significant corrections experienced by growth companies, many of which are included in our portfolios, we have taken a more cautious stance and increased cash allocation in funds and client portfolios during April and the beginning of May. As of the 4th of May, cash positions reached 35% in Sigma Real Return, 15% in Sigma Prudent Growth and 10% in Sigma Quality Stocks. We have also gradually lowered market exposure of our prudent, moderate, and tolerant discretionary portfolios. Cash holdings will help contain performance volatility, allowing us to reinvest at attractive prices once markets calm down.
As the solution to the problems threatening economic growth is still unclear, uncertainties continue to push markets down. Inflation may seem to have peaked, but the level at which it will stabilize remains a matter for speculation. If it is not low enough, the FED will continue to rise rates (the FOMC raised the rate by 50bp and markets discount similar increases going forward, that would leave fed funds rates at 2.75% by the end of 2022 and at 3.25% by the end of 2023). Recent Covid lockdowns in China have again raised doubts on supply chains, while the war in Ukraine continues to impact energy, food, and mineral prices.
It appears most of the risks have already been discounted and market bottom is hard to ascertain, with US economy still growing at an acceptable rate. For higher growth companies, the correction is encouraging some purchases. For higher quality medium growth companies, while some downward risks remain, results are in general beating expectations leaving their long-term plans unchanged. Capex continues high and should help stabilize economy. On the other hand, energy, defensive stocks, and safe haven assets are quoted at levels considerably above average, somewhat limiting their upside potential. Earnings release season has been, overall, positive, and companies have announced stock repurchase programs which should be implemented over the next weeks or months.
It is quite common that periods of utter pessimism are followed by sharp rebounds when risks begin to decrease. We must remain vigilant, protecting the portfolios in the short-term, but keeping in mind that post-crises returns tend to be quite attractive.