A Look at Energy and Bonds

A Look at Energy and Bonds

Posted on June 06, 2022
The market index, the S&P 500, added two more outlier days to close last week, bringing the yearly total to 38 days (out of 107).  After rising +1.84% on Thursday, the index gave up the small gain for the week and fell by -1.63% on Friday.  This has been the new normal, and volatility continues to show through in the markets.

It should come as no surprise that volatility, as measured by the Canterbury Volatility Index (CVI) remains high.  As a reminder, a CVI reading on the S&P 500 below CVI 75 is generally considered “low risk.”  Conversely, a CVI reading above CVI 90 on the market index is considered high risk.  Right now, the volatility of the S&P 500 is CVI 133, just a few points away from its high mark of CVI 141.  Volatility has not begun to cool off and will not go down until we begin to see a reduction in the frequency of outlier days.

Energy

If you have filled up your tank recently, it should come as no surprise that energy has been by far and away the best performing sector for the year.  Year-to-date, the S&P 500 energy sector is up more than +50%.  The rise in the sector has occurred on high volatility (the sector boasts a volatility of CVI 175), but the rise in energy has been orderly, nonetheless.  In general, energy has always been more volatile than the S&P 500, given that the sector by definition is concentrated in one area and had mostly been in a bear market from 2014 through 2021. 

So far in 2022, the energy sector has experienced 50 days beyond +/-1.50%, including an 8% drop in one day.  For the S&P 500, the split between “up” outlier days and “down” outlier days has been nearly 50/50.  For energy, nearly two-thirds of the outlier days have been to the upside.  In other words, energy is volatile, but just like the price of gas, the majority of volatility has been to the upside. 

Bonds

In our recent video, found here, we referenced an observation we made back in January.  That observation was that inflation has gone up, and one would expect interest rates would have to go up to match inflation, and therefore bonds would fall (bond pricing and interest rates have an inverse relationship).  In 2022, that is exactly what has happened, even with a falling stock market.  Bonds have done basically nothing to offset the volatility in stocks.  When stocks have fallen, so have bonds.  When stocks have rallied, well, bonds really have not.  The chart below shows an example of the S&P 500 (SPY), 20-year treasury bonds (TLT), and a balanced (50/50) portfolio of SPY and TLT.  As you can see, there has been very little “benefit of diversification” between the two asset classes.


Source: Optuma Technical Analysis

Market Leadership

The top ranked sectors, according to Canterbury’s risk-adjusted rankings, are Energy, Utilities, Basic Materials, Consumer Staples, and Health Care.  These are the only sectors that are in bullish or transitional Market States.  The bottom three sectors are Real Estate, Communications, and Consumer Discretionary.

We discussed interest rates in terms of bonds, but we believe it is conventional wisdom that most investors would assume rising rates would be good for the financials sector.  After all, if interest rates go up, banks might be expected to have higher net interest margins.  Today, however, the financials sector is in a bearish Market State (Canterbury-defined Market State), with high volatility of CVI 130. 

Just goes to show that companies and stocks are not the same.  Stocks are driven by supply and demand.  Right now, supply is outweighing demand.

Bottom Line
Not much has changed in the broad markets.  The defensive, smaller sectors that have led for most of 2022 continue to lead.  The technology-based sectors continue to lag.  Bonds remain in a bear Market State. 

Our goal in this environment is to create stability within the portfolio, regardless of the market’s large fluctuations.  Canterbury has adapted its portfolios to deal with the wide swings being experienced from many asset classes.  We will continue to monitor for any changes in the global markets and alternatives and make adaptions within the portfolio accordingly.
 
Canterbury Investment Management: Tom Hardin

More About Tom Hardin

As Chief Investment Officer, Tom has more than 30 years of experience in the investment management industry and has a broad breadth of knowledge. He is known as an innovator, educator and has been revolutionary in the advancements of portfolio and risk management.

 
Canterbury Investment Management: Tom Hardin

More About Brandon Bischof

Brandon is directly responsible for managing the Canterbury Analytics Group (CAG). To date, Canterbury Analytics Group has played an important role in advancing portfolio management from a loose art form based on subjectivity and obsolete assumptions to an adaptive process with scientific rules and methods capable of providing evidence based results and statistically relevant value add results.


Every effort was used to provide accurate data and mathematical calculations to provide, what we believe to be, accurate results. Canterbury Investment Management, LLC, and its principal owners, make no guarantee of completeness or accuracy of data or calculations as well as conclusions of any statistical data or information contained in the simulation illustrated on this page. Past results or performance is in no way a guarantee of future results.