Summary: The narratives driving much of the action in Q2 2024 were the higher for longer play out of the Fed, in response to inflation, coupled with geopolitical tensions within the Middle East. Market participants grew fearful that inflation had bottomed out and was turning back up. The brief blip in rising data seems to have ended, however. These fears were accentuated by rising commodity prices which, coincidence or not, coincided with military conflict between Israel, Hamas, and Iranian proxies.

Performance: This quarter’s woeful performance was largely due to one mistake compounded over time in conjunction with a positioning play that has yet to bear fruit. From a positioning standpoint, it was frustrating to be correct on aggregate risk performance while maintaining individual selections that completely faltered relatively speaking. I assumed a rotation into small caps from large cap tech which ultimately didn’t occur. This preceded a bigger mistake responsible for most of the losses, which was opting to disobey a portfolio rule to exit after an outsized quarterly gain had been achieved, as had been the case in Q1. The pervasive “this time is different” played a role in convincing me to remain at the table. Contingency plans to leverage margin were not well constructed and subsequently led to further losses.

Outlook: The portfolio’s posture heavily overweight small cap risk which will be maintained lest Q2 mistakes be further compounded by not allowing time to do what it will inevitably do. I expect broad equities to continue rallying through mid-summer before seeing profit taking and perhaps something more substantial in terms of a selloff by end of summer as election uncertainties take center stage. I will be watching inflation, yields, and the dollar to see if cracks in the economy begin to show. I believe this risk is still low, however the market has less of a strong footing and any risk off events could snowball if the Fed is slow to act.