Grey Owl Capital's Q4 Letter

After a third quarter where large capitalization US equities were barely up and global equities were down, both came roaring back in the fourth quarter of 2021. The S&P 500 was up 11.1% and the MSCI All-Country World Index was up 7% between the end of September and December. Commodities were up a modest 1.5%. “Safe haven” assets were also up. Long-dated US Treasury bonds added 3.2% during the quarter and gold was up 4.1%. 1

For the full year 2021, “risk assets” significantly outperformed “safe haven” assets. Commodities were up a remarkable 38.8% and global equities were up 18.7%. Both bonds and gold were down on the year. Long-dated US Treasury bonds finished down 4.6% while a broader mix of fixed income securities that includes corporate bonds was down 1.8%. Gold was 4.2% lower over the twelve-month period.

Grey Owl’s All-Weather strategy finished the year up 6.7%. In comparison, a 60/40 benchmark was up 10.5%. 2

Beginning in the middle of the year, the equity market became more and more narrow. That is, only the largest stocks were contributing positively and the market capitalization indices like the S&P 500 significantly outperformed equally weighted and smaller capitalization indices. In the fourth quarter when the S&P 500 was up 11.1%, the Russell 2000 Growth index was down 0.1% and the ARK Innovation ETF (now a bellwether for innovative, yet speculative, growth companies) was down 14%. This market narrowing contributed to Grey Owl’s underperformance (we held positions in a few small capitalization stocks for too long), but it also presaged the current market downturn and a likelihood that the downturn continues for several months or quarters.

Market Internals Have Weakened Considerably

Despite the equity rally over the past few weeks (from oversold conditions), most equity indices remain down year-to-date and market internals remain weak. For example, Lowry’s Buying Power remains in a one-year downtrend and Selling Pressure in a one-year uptrend. Selling Pressure is now well above Buying Power.

In their most recent weekly missive, Lowry’s puts the Buying Power / Selling Pressure data in context.