This is the 13th month of running our momentum portfolios. The positive momentum which started the month has carried through and THE US markets and all the portfolios have moved up over the month. The S&P and NASDAQ are now both up on the year to date.

Is there value in the strategy? The following tables shows 1) cumulative returns of the SWDA Index and 2) the relative Cumulative performance of each fund over the same horizon in each case. As you can see five out of six portfolios have outperformed in this period of volatility!

At the risk of repeating the same message, the key issue here is US underperformance.  It dominates SWDA. An interesting question now is: “will the US keep pushing SWDA ahead of other markets”?

US exceptionalism has been a big theme for the last ten years, but a dilemma for investors now is will that outperformance, driven by the Magnificent 7, come to an end and will markets like the EU outperform the US as they have done up until 2016? On a forward PE of nearly 22X, MSCI US is very expensive compared to MSCI Europe on 14.5X.  The question is nuanced (read the article!), but the valuation gap is huge.

What are the factors driving the performance? Here are the individual portfolios:

US Resilience, Iran and Oil

The “TACO” idea, or at least the reduction in hostilities has calmed markets. What is surprising is that the Israeli attack on Iran has barely been reported as a markets issue in the US press, perhaps because the US is a net exporter of oil and condensates and thus, a potential beneficiary of higher oil prices.

Oil prices which have risen and fallen back suggest the markets think that Iran is unlikely to try to block oil traffic through the Gulf of Hormuz.  It is interesting to look at the impact of the war on the Israeli market.

Recession Fears

The bigger issue driving markets and US interest rates is more domestic, the questions of “will the US have a recession” and “is inflation under control?”  Both have had positive news in the month with US and Chinese factory orders down, with weak data bringing down treasury yields at the start and again, in the middle of the month. More anecdotal evidence points to a weakening consumer 6^th June. with consumers trading down to stores like Dollar General and Procter and Gamble cutting 7,000 jobs to improve efficiencies as quarterly sales declined.

There is still a huge question mark over the federal deficit though.

Momentum in June and a new Portfolio

Continuing with the change in approach we began in March, i.e. looking at short run momentum as well, how different does the story look and will that give us a different portfolio? If we look at the short run momentum, the top ranked sectors over 4 weeks are:

• North America
• Specialist
• Global, and
• UK small companies

The 6 monthly picture suggests that the UK and EU are a settled theme. The interesting question is whether the ABUS trade (anywhere but the US!) – anything but the US is a real trend and the recovery in US stocks likely to fade? Notwithstanding the anecdotal evidence of weakening US consumers, IPO activity has kicked off again in the US with a number of successful IPOs In the month. Technology stocks produced good results lifting the indices.

Portfolio Fourteen

Last month we took the view that given the uncertainty around tariffs we eschewed a pure momentum strategy.  Given how the trade arguments have calmed, for now, perhaps we can go back to a purer momentum approach, if we do that, then after the US inc smaller cos, we would select specialist funds in energy, tech and for variety, ignoring the globals (like Blue Whale Global with a big tech focus) to Europe or UK smaller companies, depending on whether we wanted volatility (UK small companies) or a longer trend (EU)

If we are trying to outperform the SWDA, although gold demand is solid, although the heat is likely to have gone out of it as the Iran/Israel war reaches a ceasefire.