Re-balance Cycle Reminder All MyPlanIQ’s newsletters are archived here.

For regular SAA and TAA portfolios, the next re-balance will be on Monday, May 2, 2016. You can also find the re-balance calendar for 2015 on ‘Dashboard‘ page once you log in.

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.

Please note that we now list the next re-balance date on every portfolio page.

Asset Class Trend Review

Since the low on February 11, stock markets have staged a fast and furious rally that has made S&P 500 approach its all time high. In fact, its total return (dividend reinvested) just made a historically all time high. The following is the asset class return trend listed on MyPlanIQ 360° Market Overview page:

Major Asset Classes Trend

04/18/2016 (sorted based on 13 weeks returns)

Description Symbol 1 Week 4 Weeks  13 Weeks 26 Weeks 52 Weeks Trend Score
Emerging Market Stks VWO 2.65% 2.0% 22.71% -1.49% -16.35% 1.9%
Frontier Market Stks FRN 2.5% 1.0% 16.74% -0.59% -19.33% 0.06%
International REITs RWX 1.59% 2.08% 16.54% 2.29% -2.86% 3.93%
Gold GLD -1.91% -1.03% 13.12% 5.11% 2.63% 3.59%
Commodities DBC 1.95% 0.0% 12.89% -10.04% -23.74% -3.79%
US Stocks VTI 2.75% 2.44% 12.37% 3.1% -0.06% 4.12%
US Equity REITs VNQ 0.95% 4.14% 12.12% 5.88% 6.96% 6.01%
International Developed Stks VEA 3.89% 2.56% 11.08% -1.9% -7.76% 1.57%
International Treasury Bonds BWX -0.46% 1.89% 8.79% 5.43% 5.12% 4.15%
Emerging Mkt Bonds PCY 1.07% 1.61% 8.75% 4.15% 5.73% 4.26%
US High Yield Bonds JNK 1.75% 1.33% 8.07% -1.58% -6.37% 0.64%
Intermediate Treasuries IEF -0.36% 1.46% 2.73% 3.22% 3.41% 2.09%
Total US Bonds BND 0.01% 1.18% 2.65% 2.53% 1.97% 1.67%
US Credit Bonds CIU 0.18% 1.27% 2.64% 2.15% 1.72% 1.59%
Municipal Bonds MUB 0.14% 1.27% 1.41% 3.71% 4.39% 2.19%
Mortgage Back Bonds MBB -0.02% 0.5% 0.94% 1.37% 1.78% 0.91%
Treasury Bills SHV 0.03% 0.05% 0.13% 0.11% 0.15% 0.09%

The following table shows the year to date and 1 year returns of major asset classes: 

Major Asset Class Performance (as of 4/18/2016), sorted on 1 Yr AR
Ticker/Portfolio Name YTD
Return**
1Yr AR
VNQ (Vanguard REIT ETF) 5.8% 6.1%
GLD (SPDR Gold Shares) 16.2% 2.5%
BND (Vanguard Total Bond Market ETF) 3.5% 1.9%
VTI (Vanguard Total Stock Market ETF) 2.2% -1.1%
VEA (Vanguard FTSE Developed Markets ETF) 0.9% -7.6%
VWO (Vanguard FTSE Emerging Markets ETF) 7.9% -16.6%
DBC (PowerShares DB Commodity Tracking ETF) 1.5% -24.6%

Gold, emerging market stocks and REITs have done best year to date. 

Emerging market stock strength

Both of the above two tables are indicating that Mr. Market is at least tilted to a belief that global markets, especially emerging markets, are now turning a corner. The best performing assets year to date and in the last 13 weeks include gold, emerging market stocks, REITs and bonds. Furthermore, bonds have done well. In fact, BND has a higher year to date return than S&P 500 year to date. 

One can deduce investors’ current beliefs: 

  • Global economy is turning a corner, especially emerging markets. Is this really true? One of the major factors is whether China is and will be experiencing a hard landing or much slower growth. Without a long period of adjustment, it’s almost impossible for China to shake off its enormous debt and become a healthier balanced investment and consumption economy. 
  • Interest rates will stay low (the strength of gold, REITs and bonds). Perhaps the Federal Reserve’s decision to slow down its rate hike has sparked the current rally, giving a hope that rates will stay low for a long period of time while allowing other economies to have time adjust. However, even if this is true, the currency devaluation from major currencies such as Euro and Yen and conflict among major countries will not go away. Year to date, US dollar has lost over 4.5% against other major currencies:
US dollar weakness: 
Currency ETFs YTD
Return**
1Yr AR
UUP (PowerShares DB US Dollar Bullish ETF) -4.5% -4.4%
FXE (CurrencyShares Euro ETF) 3.6% 4.1%
FXY (CurrencyShares Japanese Yen ETF) 10.4% 9.1%
CNY (Market Vectors Chinese Renminbi/USD ETN) 2.6% -2.7%

Earnings continue to go down

However, fundamental is still not boding well with the markets. In fact, based on the latest Factset report (on 4/15/2016):

  • Q1 2016 will mark the fourth consecutive negative earnings growth quarter. The blended earnings (reported and projected combined) is -9.3%.
  • Q1 earnings expectation has been revised downward continuously. 
  • The forward 12-month P/E is much higher than the past 5 year and 10 year average, let alone right now, Shiller CAPE10 is over 40% overvalued (i.e. the average 10 year PEs is way above its 10 year long term average). It’s an expensive market. 
  • Even though earnings are more impacted by US dollar weakness, companies that have less than 50% sales outside of the US are still predicted to have their earnings declined by -3.5%. Thus, the weakness is not just currency related. Domestic companies are also slowing down. 
  • Excluding energy sector (which obviously has been weak), earnings of other companies are still down by -4.2%.

Finally, from the following chart: 

It’s clear that S&P 500 price is essentially tracking the 12-month EPS for the past one year. With earnings being down for the whole year, S&P 500 can only break out its historically high by expanding its P/E multiple, that means more expensive. 

To summarize, the current rally is more induced by weak dollar and/or Federal Reserve’s dovish rate policy than company fundamentals. If economy fundamental can break out from current range and grow again, stock prices can certainly go higher. That seems to be what Mr. Market is banking on. 

Market Overview

As discussed above, stocks are now back to their old high range. It’s becoming more important to see whether the current strength is a broad base or not. At the moment, large cap stocks are still outperforming small cap stocks, even though the picture has improved: for example, S&P equal weight ETF RSP (Guggenheim S&P 500 Equal Weight ETF) has returned 3.9% year to date, better than SPY’s 3.2%. We are cautiously optimistic short term but remain more leery long term. 

For more detailed asset trend scores, please refer to 360° Market Overview

We would like to remind our readers that markets are more precarious now than other times in the last 6 years. Since the financial crisis in 2008-2009, we have not seen substantial structural change in the U.S., European and emerging market economies. Even though U.S. stocks have had a recent correction, their valuation is still at a historical high level.  It is thus not a good time to take excessive risk. 

We again would like to stress for any new investor and new money, the best way to step into this kind of markets is through dollar cost average (DCA), i.e. invest and/or follow a model portfolio in several phases (such as 2 or 3 months) instead of the whole sum at one shot. 

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