Markets initially responded positively in the last hour of trading yesterday with the announcement by Federal Reserve Chair Jerome Powell that the central bank approved raising interest rates 0.50% this month and likely for the next two months, but as investors digested the news of balance sheet reduction beginning in June for the Fed, stocks have dropped once more today, led by growth stocks, reports the Wall Street Journal.
The three major indexes are all tracking loss of the gains they made Wednesday, and the yield on the 10-year Treasury note is above three at 3.084%, up from 2.914% Wednesday. Bond yields and bond prices move opposite to each other so that rising yields equate to tanking bond prices.
Of greatest concern is the combination of the interest rate increase with the reduction of the Fed balance sheet as the central bank begins to shed bonds. It’s the most aggressive stance that the Fed has taken in over two decades and will directly impact volatility within the markets.
“The Fed is reducing liquidity in the markets, and that’s driving up volatility, and so this could be our new normal here for a bit until the Fed gets inflation under control and changes the policy,” said John Ingram, CIO and partner at Crestwood Advisors.
How long it takes to curtail the current 8.5% inflation is unknown, and while many analysts believe that inflation is either at or near its peak, the inflationary pressures happening globally could work to keep it elevated for months to come. For now, it’s a guessing game for advisors and investors as volatility continues.
Managed Futures Perform Strongly in Macro Volatility
For advisors and investors seeking non-correlated hedging opportunities, the KFA Mount Lucas Index Strategy ETF (KMLM) from KFAFunds, a KraneShares company, offers investment with managed futures.
KMLM’s benchmark is the KFA MLM Index, and the fund invests in commodity currency and global fixed income futures contracts. The underlying index uses a trend-following methodology and is a modified version of the MLM Index, which measures a portfolio containing currency, commodity, and global fixed income futures.
The index and KMLM offer possible hedges for equity, bond, and commodity risk and have demonstrated a negative correlation to both equities and bonds in bull and bear markets. Investing in managed futures offers diversification for portfolios, and carrying them within a portfolio can potentially help mitigate losses during market volatility and sinking prices.
The index weights the three different futures contracts types by their relative historical volatility, and within each type of futures contract, the underlying markets are equal dollar-weighted. Futures contracts will be rolled forward on a market-by-market basis as they near expiration.
Futures contracts in the index include 11 commodities, six currencies, and five global bond markets.
The index evaluates the trading signals of markets every day, rebalances on the first day of each month, invests in securities with maturities of up to 12 months, and expects to invest in ETFs to gain exposure to debt instruments.
KMLM carries an expense ratio of 0.90%.
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