Athos Capital Advisors – Monthly Newsletter – July 2022

Quote of the Month

Realize that everything connects to everything else.
― Leonardo da Vinci

Market Performance


Market Commentary

Stocks and bonds both snapped back abruptly in July on the heels of a perceived dovish pivot by the Federal Reserve.  The market quickly repriced expectations for Fed rate hikes after Jerome Powell’s press conference, and the expectation is now for the Fed to raise rates to ~3.5% by February 2023 and then to begin cutting rates midway through next year – down from a prior expectation of 4.5%.  This sparked a broad-based rally with beaten down, long duration assets such as technology and growth stocks rallying the most.  Many leading indicators are still flashing red and point towards an ensuing economic slowdown suggesting investors remain cautious.  Markets always look forward, however, making it important to remain invested with proper diversification and discipline.  Parts of the stock and bond markets have re-rated significantly and now provide better values.

Inflation remains high – Inflation remains high and will likely challenge the current market assumption that the Fed can only raise rates to 3.5% and then begin cutting.  In the near term falling oil and gas prices should help alleviate some inflationary pressure.

Yield curve inversion – the 2-10 year yield curve remains firmly inverted, one of the classic indicators that always precedes a recession (every recession in post war history has been preceded by a sustained yield curve inversion).

Consumer debt levels rising – the American consumer has significantly increased their use of credit card debt and is saving much less.  Part of the increase in credit card debt is attributable to summer travel booking.  Nevertheless, this is a worrying trend and may portend a hangover and reduced spending as we get into the Fall and Winter.

Future expected returns have been rising – the steep rise in interest rates and sell off in stocks has resulted in a reset in asset values and has increased the future returns investors in stocks and bonds are likely to receive.  Starting yields on bonds have risen from virtually zero to more attractive levels (for example the 2 Year US Treasury now yields 3.07% up from 0.20%).  The chart below is from a calculation provided by Morgan Stanley based on a forecasting model.  We have been finding attractive new investments across the stock and bond markets as valuations have improved.

Cloud software stocks looking interesting – finding a bottom 

There are finally things to buy

  • Short duration bonds at 4.5% (PFIIX)
  • Income funds at 6.5% (PIMIX)
  • High yield bonds at 10-12% (PDO, PFLEX)
  • High quality growth companies that have fallen 40-50% (Edgewood)
  • Software stocks that have fallen 80% (WCLD)
  • Biotech stocks that have fallen 80% (XBI, LABU)

Top of the capital structure looks very attractive, your return probably approximates your ingoing yield – probably slightly more

High growth stocks look like they have bottomed and some really good companies that are growing quickly have gone full circle and are now at pre-2020 levels.  Scale into these for higher growth over a 3-5 year time horizon.

You can now build a much better portfolio than 1-2 years ago. Get income and low volatility returns in bonds.  Will likely get good returns again from bombed out growth stocks.

Geopolitical risks remain extremely elevated.  The Xi-Putin bloc is constantly challenging the US-led global order.  

Interval Funds continue to perform strongly

Athos Capital’s Interval Funds have continued to perform very strongly in a challenging market.  We continue to think these are the best assets to own right now and expect them to do well in a range of economic scenarios while providing income and exceptionally low volatility returns.