July 31, 2024
Commentary
Monthly commentary discusses recent developments across the Ninepoint Diversified Bond, Ninepoint Alternative Credit Opportunities and Ninepoint Credit Income Opportunities Funds.
As discussed last month, economic momentum has started to wane, and this has caught the attention of central banks. At their July meetings, both the BoC and the Fed emphasized the downside risks facing the economy, while diminishing somewhat the importance of inflation. As the thinking goes, a cooler economy and labour market will bring wages down, helping to take services inflation back to levels consistent with their inflation targets. However, by emphasizing the downside risks and avoiding the term “soft landing”, there was a clear change of tone.
Central banks are like big cargo ships, they take a long time to adjust direction, but once they do, you can expect the new trend to hold. This important shift in the central bank narrative didn’t go unnoticed by market participants, who, for several months now, had completely bought into this idea of a soft landing.
The setup couldn’t have been worse. In early July, equity markets were making new highs, largely driven by the AI narrative, credit spreads were generally back to cycle lows, and overall positioning by investors was very long across asset classes.
The combination of disappointing Q2 earnings at major tech giants and consumer facing firms, the questioning by investors of the durability and magnitude of this AI capex cycle (or bubble) and finally the realization that downside risks to the economy should be coming to the forefront, drove a massive repricing late in the month and into August.
The straw that broke the camel’s back was the U.S. July jobs report where the unemployment rate increased to 4.3%, triggering what is known as the Sahm Rule (after economist Claudia Sahm). This “rule” is more of an observation, that historically, when the 3-month moving average of the unemployment rate has increased by more than 0.5% above its 12-month low, the economy has been in recession. We show both the U.S. and Canadian measures of the Sahm rule in Figure 1 below, with yellow shading indicating U.S. recessions. This metric does a pretty consistent job of identifying official recession starts. Even here in Canada, we can see that the Sahm rule seems to work pretty well at identifying major slowdowns (1998, 2001, 2015) and recessions (1981, 1990, 2008, 2020).
Following this release, expectations for 2024 Fed rate cuts (Figure 2 below) went from about 1-2 cuts (consistent with a soft-landing scenario) to pricing as many as 6 cuts for the last 3 meetings of the year (more consistent with a hard landing scenario). Since then, tensions have subsided a bit as a few data points (ISM services, jobless claims) have surprised a bit to the upside. We expect the market to be extremely sensitive to every piece of economic data between now and the next payroll report in early September, which should cement the narrative with regard to the economy.
Volatility has since come down slightly, but one thing is clear: some of the key assumptions that were holding the markets in this goldilocks mood are being seriously challenged by the events of the past 4 weeks.
We still believe that we are in the very last innings of the economic cycle. Monetary policy is working, with its usual lag, and it is showing up in the economic data. Small decreases in the policy rate will do little to reinvigorate the economy, and therefore the odds are that central banks will need to cut rates more aggressively over the next 12-months, which should bring interest rates down across the curve and benefit our long-term government bond positions.
By contrast, risk assets are still very expensive, and should experience more downside if the economy deteriorates further. We continue to be conservatively positioned in credit, with exposure mostly in short duration, high quality corporate bonds and credit hedges for additional ballast.
Our funds are all defensively positioned to protect our investors from a recessionary scenario. Even with higher volatility this past month all our strategies endured, our year-to-date returns now range from 3.89% to 6.2%.
Ninepoint Diversified Bond Fund |
Ninepoint Alternative Credit Opportunities Fund |
Ninepoint Credit Income Opportunities Fund |
iShares Core Canadian Universe Bond ETF |
||
|---|---|---|---|---|---|
Year-to-date return |
3.89% |
6.20% |
6.18% |
1.69% |
|
Max Drawdown YTD |
-1.57% |
-0.16% |
-0.02% |
-3.45% |
Source: Bloomberg & Ninepoint Partners, as of July 31, 2024.
Until next month,
Mark, Etienne & Nick
Appendix
Ninepoint Diversified Bond Fund
NINEPOINT DIVERSIFIED BOND FUND - COMPOUNDED RETURNS¹ AS OF JULY 31, 2024 (SERIES F NPP118) | INCEPTION DATE: AUGUST 5, 2010
1M |
YTD |
3M |
6M |
1YR |
3YR |
5YR |
10YR |
Inception |
|
|---|---|---|---|---|---|---|---|---|---|
Fund |
2.0% |
3.9% |
4.4% |
4.2% |
8.3% |
-0.4% |
1.2% |
2.4% |
3.3% |
Ninepoint Alternative Credit Opportunities
NINEPOINT ALTERNATIVE CREDIT OPPORTUNITIES FUND - COMPOUNDED RETURNS¹ AS OF JULY 31, 2024 (SERIES F NPP931) | INCEPTION DATE: APRIL 30, 2021
1M |
YTD |
3M |
6M |
1YR |
3YR |
Inception |
|
|---|---|---|---|---|---|---|---|
Fund |
1.2% |
6.2% |
3.9% |
5.7% |
10.7% |
1.3% |
1.6% |
Ninepoint Credit Income Opportunities
NINEPOINT CREDIT INCOME OPPORTUNITIES FUND - COMPOUNDED RETURNS¹ AS OF JULY 31, 2024 (SERIES F NPP507) | INCEPTION DATE: JULY 1, 2015
1M |
YTD |
3M |
6M |
1YR |
3YR |
5YR |
Inception |
|
|---|---|---|---|---|---|---|---|---|
Fund |
1.2% |
6.2% |
3.4% |
5.3% |
10.2% |
2.6% |
5.4% |
4.8% |
