April 2, 2012: Current Economic and Market Fundamentals

04/02/2012 Share 0 comments

Re-balance Cycle Reminder

Based on our new monthly re-balance calendar, the next re-balance time will be on Monday, April 23, 2012. You can also find the re-balance calendar of 2012 on 'My Portfolios' page.

As a reminder to expert users: advanced portfolios are still re-balanced based on their original re-balance schedules and they are not the same as those used in Strategic and Tactical Asset Allocation (SAA and TAA) portfolios of a plan.

March Review

Why Fundamentals?

We believe that understanding economic and market fundamentals has everything to do with successful investments. Though our Strategic and Tactical Asset Allocation Strategies seem to be price/market driven, fundamental evidences should be used for investment planning. These include:

• How to start a new investment account for new investors or new chunk of money. Current economic and market fundamentals help to decide whether to adopt a defensive or more active stance for risk asset investments.
• Long term economic trend helps to decide what strategies and weights for these strategies to be used. Strategic asset allocation should be emphasized in an economic recovery and prosperous period while tactical asset allocation should be used more to preserve capitals in times of uncertainty or trouble. This, for example, also impacts the weights of core and satellite portions in a core-satellite portfolio (see, for example,Investment Management: Permanent Portfolios In Core Satellite Portfolios).
• For retirement planning purpose, long term (10 to 15 years) perspectives are very critical in working out a proper allocation for the intermediate and long term portion of a portfolio, regardless of what strategies (strategic or tactical) you are using. For example, given an elevated stock market valuation, one can use long term stock return estimate to help to decide what kind of expected returns for the long term investments. Long term (such as 10 or 15 years) stock returns are surprisingly reasonably accurate. We will have more articles on this subject. For now, for readers who would like to understand this subject more, we again recommend highly on John Hussman's weekly commentaries, which have addressed 10 year stock return estimate frequently.

Current Economic Fundamentals

Most recent economic data are mixed, tilted slightly to the positive side:

• March ISM Manufaturing came in 53.4 but Construction Spending was down -1.1% for February. Globally, Europe has the worst shape with various indicators pointing to on going recession or slowdown. Asia has been a brighter spot but with plenty of worries. 
• US Disposable Personal Income has been up with a slower rate but personal spending is way up. Americans are again not saving enough.
• Unemployment rate is still high at 8.3% with declining low labor force participation rate (63.7%).

• Inflation/Deflation: CPI is low but energy cost (oil price specifically) is sky rocketing. Housing is still the weakest.

Market Valuations

Stock market valuation, by a long term historical standard, is not cheap. See our latest article Stock Market Valuation Metrics Update.

Summary

To summarize, the recovery is still fragile. If economy does recover strongly, its mega up trend will be here for years and investors should have patience for this to play out. For now, we do not see the global economic structured fundamentals have been much changed.

Portfolio Reviews

The following is the performance of the five strategic portfolios on our Brokerage Specific ETF Portfolios page:

More detailed comparison>>

The strategic asset allocation portfolios continue to do well.

As a reminder, the comparison link is also listed on our Brokerage Specific ETF Portfolios page.

Asset Class Trend Review

We make the following observations:

In March, US stocks (VTI) and US REITs (VNQ) continued their strength. International developed market stocks (EFA) had 0.22% return in the past 4 weeks, virtually staying flat. Furthermore, emerging market stocks (VWO) had -3.34% loss in the past 4 weeks. Commodities (DBC) lost -2.3% while Gold (GLD) losing -2.5%.

Also noticeably, high yield (junk) bonds had -0.93% loss in the last 4 weeks.

Most bond ETFs lost their value in March. Only Mortgage backed securities (MBB) had a gain.

All in all, March continued its “US lead its way out” theme with other risk assets limping along.

See major asset trend table on 360° Market Overview for more details.

Again, we would like to emphasize the high risk in stock markets. For new investors, we repeat that it is important to adopt gradual exposure to risk assets using strategies suh as dollar cost averaging.

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