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, November 28, 2016. You can also find the re-balance calendar for 2016 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.

Rising Rate And Current Bond Trend

Currently, bond markets have experienced a possible trend change: it all comes down to the possible interest rate hike by Federal Reserve in December. Based on Fed Funds Futures trading, traders are expecting an over 70% probability that the Fed will raise interest rate by 25 bps (or basis points, i.e. 0.25%) in December: 

Courtesy of CME FedWatch tool

Inflation has picked up noticeably, now it’s hoovering around the 2% rate that the Federal Reserve is targeting: 

This has created some reasonable change in various bond segments: 

Fixed Income Assets Trend

As of 11/07/2016

Description Symbol 1 Week 4 Weeks  13 Weeks 26 Weeks 52 Weeks Trend Score
Emerging Mkt Bonds PCY 0.51% -1.72% -0.43% 7.11% 13.08% 3.71%
High Yield JNK 0.6% -0.93% 1.17% 7.41% 6.99% 3.05%
International Inflation Protected WIP 0.27% -0.32% -0.66% 2.56% 8.88% 2.14%
Long Term Credit LQD 0.06% -0.87% -0.7% 2.47% 8.92% 1.97%
Inflation Protected TIP -0.03% 0.29% 0.4% 2.21% 6.87% 1.95%
20+ Year Treasury TLT -0.29% -1.7% -5.0% 0.94% 12.99% 1.39%
Intermediate Term Credit CIU 0.07% 0.01% -0.17% 1.37% 4.8% 1.21%
US Total Bond BND 0.05% -0.22% -0.54% 1.16% 5.36% 1.16%
Intermediate Treasury IEF 0.13% -0.13% -1.18% 0.33% 6.46% 1.12%
10-20Year Treasury TLH -0.02% -0.55% -2.44% 0.43% 7.95% 1.07%
International Treasury BWX 0.69% -1.38% -2.81% -0.75% 9.46% 1.04%
MBS Bond MBB 0.03% -0.04% 0.21% 0.91% 3.37% 0.9%
California Muni CMF 0.26% -0.04% -1.1% 0.06% 4.72% 0.78%
National Muni MUB 0.11% -0.25% -1.22% -0.06% 4.43% 0.6%
Short Term Credit CSJ 0.02% 0.06% 0.03% 0.53% 1.9% 0.51%
New York Muni NYF 0.1% -0.45% -1.37% -0.29% 3.93% 0.38%
Short Term Treasury  SHY 0.07% 0.19% 0.08% 0.24% 1.18% 0.35%
Treasury Bills SHV -0.03% 0.04% 0.07% 0.11% 0.34% 0.11%

Specifically, long term bonds (TLT, TLH) and Municipal bonds (MBB,MUB, CMF, NYF) have been hit hard. Inflation protected securities TIP, on the other hand,  has been a bright spot. 

Last week’s risk asset decline (mostly caused by the presidential election?) also affected high yield bonds and emerging market bonds, both of which are considered risky among all bond segments. However, they recovered somewhat today in sync with the general stock market recovery.

Regardless of whom will be elected as the US president tomorrow, we believe the fixed income market will experience  a short term uncertainty. Bonds are indeed on the cusp of a major trend change. 

Total return bond fund performance

Total return bond funds have also been affected since October: 

Portfolio Performance Comparison
Ticker/Portfolio Name 1 Week
1Yr AR 3Yr AR 5Yr AR 10Yr AR
PBDDX (PIMCO Investment Grade Corp Bd D) -0.1% 8.3% 7.0% 5.2% 5.7% 7.2%
LSBRX (Loomis Sayles Bond Retail) -0.5% 7.9% 4.4% 1.7% 4.6% 5.6%
PONDX (PIMCO Income D) -0.2% 6.7% 5.6% 5.4% 8.4%  
WABRX (Western Asset Core Bond R) 0.2% 5.6% 5.0% 4.0%    
MWTRX (Metropolitan West Total Return Bond M) 0.0% 4.3% 4.5% 3.2% 4.4% 6.1%
PTTDX (PIMCO Total Return D) 0.2% 4.2% 4.2% 2.7% 3.4% 5.6%
TGMNX (TCW Total Return Bond N) 0.1% 3.9% 3.7% 3.2% 4.7% 6.4%
DLTNX (DoubleLine Total Return Bond N) 0.0% 3.1% 3.0% 3.6% 4.1%  

It’s not surprising that LSBRX (Loomis Sayles Bond Retail) has been affected mostly last week: it has the most exposure to low quality or high yield bonds. The two PIMCO income funds (PONDX and PBDDX) have most exposure in corporate bonds, which were again hit harder last week. 

It should be noted that DLTNX (DoubleLine Total Return Bond N) has been ranked at the bottom for its YTD and last 1 year returns. This is the first noticeable under performance in the recent years for this fund. This is because the fund had become more concerned about inflation and it has more exposure to short duration or short term high quality bonds. Whether its bet will pan out in the intermediate term or not is still to be seen. This again proves there is no a single (fund manager) investor who can always have a hot hand and outperform indefinitely. We have to adopt a more realistic way to select funds with good intermediate term momentum to achieve a long term superior performance. So far, our total return bond fund portfolios listed on Brokerage Investors page have proved to be just like that: effective in the long term. 

Market Overview

As of last Friday, Factset again reports that the blended (combined with 85% already reported and 15% expected) earnings growth rate for the S&P 500 is 2.7%, compared with the expected -2.2% year over year decline on September 30. It now looks very likely that Q3 will be the first positive earnings growth since 2015. Furthermore, the blended revenue growth rate for Q3 2016 is 2.6%. The earnings recession is most likely over for now. 

We also would like to point out that from the same report, one can see that the S&P 500 companies derived about 31% of their revenue from oversea. This is significant: the newly elected president, regardless of whom that will be, will surely enact policies that place more trade barriers under the voters’ pressure. This will in turn greatly affect the US large companies’ earnings, at least in the coming years. 

As always, we will stay on course and respond based on our strategies. 

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

The current nasty presidential election is a reflection to the long standing reality facing Americans and others: since the financial crisis in 2008-2009, not much substantial structural change in the U.S., European and emerging market economies has taken place. Economies have heavily relied on low interest debts. Capital might be misallocated to unproductive investments and consumption. In terms of investments, U.S. stock valuation is at a historically high level. It is thus not a good time to take excessive risk. However, we remain optimistic on U.S. economy in the long term and believe much better investment opportunities will arise in the future. 

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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