The latest US inflation print came in at 3.2%, edging up 0.2% month-on-month, while core inflation, which excludes food and energy, also rose 0.2% since June to an annual rate of 4.7%. Both figures were broadly in line with market expectations and are a long way from the 9.1% peak in US inflation. However, the numbers are still above the Federal Reserve’s (Fed) 2% target, casting doubt on whether the US battle with price rises is over.
There are additional events that could put upward pressure on inflation again. In the US auto and transportation industries, for instance, the summer has been punctuated by strikes and wage negotiations. The International Brotherhood of Teamsters, a US labour union, threatened a walkout from Yellow Transportation, which subsequently led to Yellow, an important player in the less-than-truckload (LTL) market for small freight quantities, filing for bankruptcy. UPS avoided calamity at the end of last month by agreeing a wage rate increase up to 8% for its unionised workforce in the first year and subsequent 3% hikes in years two to five.1 The next major negotiations will take place in September between the United Auto Workers and the major North American automakers, with some headlines alleging the union will be asking for a 40% pay increase on behalf of its members.2 The likely result: higher transportation, logistics and auto costs, as well as increased labour costs.
This all runs counter to the Fed’s initiatives to keep pricing in check and to bring inflation down to 2% and could ultimately create upward pressure on interest rates. In March 2023, we saw Silicon Valley Bank (SVB) collapse in the face of rising rates, sparking volatility in equity markets. Although poor management undoubtedly played a significant part in the regional bank’s demise, it raises the question as to what the unexpected consequences of further rate rises could be.
Trend-following after a reversal
In April this year, following the collapse of SVB and the market reversals that caused losses for trend-followers, we looked to history to see if there might be clues to trendfollowers’ subsequent performance. So here we are, five months on; has history indeed been a good guide?
In our original note here, we plotted the five worst five-day drawdowns of the Société Générale Trend Index since January 2000 (Figure 1), aligned at the pre-reversal point, and extending backwards and forwards 12 months.
Figure 1. What happens after a reversal?
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Source: Man Group database and Société Générale; January 2000 to July 2023.
The pattern that emerged was revealing. Firstly, reversals, by definition, occur at the end of a trend; notice the good performance of previous episodes, encapsulated by the “average” line in red, in the 12-months prior to the trend peak. Secondly, losses around the reversal are broadly well contained; this is trend-following behaving as it should, with models quickly reacting to close out positions. Finally, and perhaps most importantly, trends invariably re-emerge following a reversal with trend-following strategies typically recouping losses within six to 12 months.
The blue line represents the current episode, centred on the SVB crisis that occurred on 9 March 2023, extended from our initial study to include the latest four months of returns. It does indeed appear that the post-SVB recovery in trend-following performance does fit history’s script. We’re not quite back to peak yet, but if history is any guide…
(With contributions from Rupert Goodall, Client Portfolio Manager, Man AHL)
1. UPS, Teamsters Agree to Contract Avoiding Strike - Bloomberg
2. United Auto Workers Asks for 40% Pay Raise in Negotiations With Carmakers - Bloomberg
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