
December 31, 2017
The DRC Global Diversified program gained
7.9% in December on the back of a strong trend
in EUR/USD and rising crude oil prices. However,
looking back on the full year 2017, the program
lost 10.11% as many markets were trapped in
narrow price ranges in an extremely
low-volatility environment.
Although 2017 was a challenging year for DRC,
the performance was not incomprehensible in
relation to the program’s 26-year performance
history. By many metrics, 2017 was the best-ever
year for investments with “risk-on” exposures as
almost everything produced stellar returns. The
following is a sampling of the records broken
across asset classes:
Equities: The S&P 500:
- Had a “perfect year”
- the first time in its history that it was up
every single month of the year.
- Had the longest ever
stretch without a 3% correction (279 business
days and counting).
- Had the longest ever
stretch without a 5% correction (373 business
days and counting).
Equity volatility:
- The VIX index fell
to its lowest level in history at 9.1%.
- Realized volatility
(1-year monthly) of the S&P 500 fell to its
lowest level in history at 3.9%.
- 18 of the 20 lowest
ever readings of the VIX index were registered
in 2017.
Fixed Income: Interest rate volatility
fell to its lowest level in history.
Credit:
- The European High
Yield credit spreads fell to less than 2%,
their lowest levels in history.
- The US Investment
Grade credit spreads fell to the lowest level
since 2007.
Foreign Exchange: Implied and realized
volatilities in foreign exchange fell close to
their lowest levels reached in 2014 and 2007.
This is an extraordinary time in global
financial markets. Nearly a decade of liquidity
injections by central banks, totaling over $11
trillion, has created a surreal, risk-less
environment where everything only goes up and
every dip is an opportunity to buy more. It
seems that investors’ confidence in this regime
continuing has never been greater. However,
against this “everything is going up” backdrop,
the ground is gradually shifting. The Federal
Reserve hiked rates 3 times in 2017 and is
likely to hike a similar amount in 2018 while
reducing the size of its balance sheet. The ECB
is halving its asset purchase program at the
beginning of 2018 and will most likely end it
during the year. In total, central bank asset
purchases are expected to decline by $1.6
trillion in 2018 compared to 2017. And interest
rates are expected to rise.
Moreover, with valuations rising to higher
and higher levels and leverage and investor
confidence increasing, the margin of error is
getting narrower. A relatively small change in
expectations and risk perception may trigger in
a large market move, possibly wiping out years
of returns. If history is a guide, trend
following CTA programs like ours may do very
well under these circumstances.
Sincerely,
Bill Dreiss,
President
Dreiss Research Corporation
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
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