October’s CPI print of a 7.7% rise year-over-year was met with strong market upward momentum as the major equity indexes rallied on hopes of Fed easing in December. While it remains to be seen whether this rally will have legs, the rapid upswings and subsequent plummets have been an all-too-common occurrence in a year of prolonged volatility and bear markets, an environment where trend-following strategies like managed futures thrive.
Broad inflation was up 0.4% month-over-month while core inflation that removes food and energy and is one of the main inflationary gauges that the Fed looks at, was up 0.3% month-over-month and 6.3% year-over-year. The gains were the smallest amounts that inflation has increased since January of this year and have given rise to hopes that this slowing might prompt the Fed to only raise rates by 0.50% at December’s FOMC meeting.
Inflation has become increasingly entrenched over the year, spiking initially in goods but spreading out more broadly into services, a notoriously difficult area to slow inflationary momentum once it is established.
“A strong labor market and strong job growth supports strong demand, which allows inflationary pressures to stay elevated,” Blerina Uruci, U.S. economist at T. Rowe Price, told the WSJ. “You’ve got more demand chasing goods and services, the supply of which is being impaired at the moment for a number of reasons.”
The jobs market continues to remain resilient, one of the primary targets that the Fed is hoping to slow through its aggressive interest hiking regime. On top of that, the housing market and rental prices have already begun falling but because housing’s representation generally lags upwards of six months or more in CPI, that relief isn’t likely to be reflected anytime soon. Housing costs, measured through owners’ equivalent rent, account for two-fifths of core CPI.
DBMF Rides Trends, Regardless of Market Directionality
So what does it all mean for markets? Time will tell if markets can sustain their current upward trajectory and how the Fed will choose to close out the year regarding rates, but one thing remains certain: uncertainty, at least for the tail end of the year.
Trend-following strategies take the stress out of trying to anticipate market trajectories by only investing based on how stocks are currently moving, not where they might be headed. Managed futures invest based on what is trending and can thrive in volatile markets and uncertainty no matter which direction markets are moving, and few have done it as spectacularly this year as the iMGP DBi Managed Futures Strategy ETF (DBMF).
The fund seeks long-term capital appreciation by investing in some of the most liquid U.S.-based futures contracts in a strategy utilized by hedge funds and has 33.17% returns year-to-date as of 11/09/2022. It has over $1 billion in AUM and is the largest of any managed futures ETF.
DBMF allows for the diversification of portfolios across asset classes that are uncorrelated to traditional equities or bonds. It is an actively managed fund that uses long and short positions within the futures market on several asset classes; domestic equities, fixed income, currencies, and commodities (via its Cayman Islands subsidiary).
The position that the fund takes within domestically managed futures and forward contracts is determined by the Dynamic Beta Engine. This proprietary, quantitative model attempts to determine how the largest commodity-trading advisor (CTA) hedge funds have their allocations. It does so by analyzing the trailing 60-day performance of CTA hedge funds and then determining 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.
DBMF has a management fee of 0.95%.
For more news, information, and strategy, visit the Managed Futures Channel.