Inflation Report Re-Emphasizes the Need for Volatility Protection

Heading into 2023, inflation was going to remain the hot topic in the capital markets, with all eyes on the first month’s inflation report. Inflation came in a bit hotter than anticipated, reminding investors that volatility is still a concern moving forward in 2023.

The expectation that the U.S. Federal Reserve would loosen its monetary policy got off to the wrong start with January’s inflation report. As such, investors shifted into a defensive stance, especially after last year’s tumult in the stock market.

Still, the numbers weren’t too bad, which could hint that future inflation reports could show more signs of easing. Nonetheless, any indications of inflation ticking higher could send the major stock market indexes in the red.

“Inflation eased slightly at the start of 2023, advancing 6.4% in January from a year earlier, as consumer prices increased for energy, housing, food and many other items,” a Wall Street Journal report said.

“The increase in the consumer-price index, a closely watched measure of inflation, edged down from 6.5% in December, the Labor Department said Tuesday (February 14),” the report added. “That marked the seventh straight month of easing inflation since peaking at 9.1% in June, the highest reading since 1981.”

The Fed noted that getting inflation under control won’t be an overnight accomplishment. As such, relatively high inflation could be here to stay for some time, which warrants a hedging strategy in case volatility strikes again (and it typically does).

“While the overall trend continues to improve, inflation continues to wield formidable momentum,” said Sarah House, senior economist at Wells Fargo. “The Federal Reserve is justified in its concern that inflation won’t easily be brought to heel.”

Ease Volatility With Managed Futures

To gain potential upside in the markets while limiting volatility, investors can opt for an exchange traded fund (ETF) that incorporates a managed futures strategy. With its 0.85% expense ratio, consider the iMGP DBi Managed Futures Strategy ETF (DBMF).

For portfolio diversification, DBMF invests in asset classes uncorrelated to traditional equities or bonds. For a dynamic component, the fund is actively managed, allowing for adjustments to the fund’s holdings by seasoned portfolio managers.

DBMF uses long and short positions in the futures market for hedging against wild swings in the market. As mentioned, positions span across a broad range of assets, including domestic equities, fixed income, currencies, and commodities (via its Cayman Islands subsidiary).

The fund’s position within domestically managed futures and forward contracts is determined by the Dynamic Beta Engine, which analyzes the trailing 60-day performance of CTA hedge funds and then determines a portfolio of liquid contracts that would mimic the hedge funds’ averaged performance (not the positions). DBMF takes long positions in derivatives with exposures to asset classes, sectors, or markets that are anticipated to grow in value and takes short positions in derivatives with exposures expected to fall in value.

For more news, information, and analysis, visit the Managed Futures Channel.