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, June 11, 2017. You can also find the re-balance calendar for 2017 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 Rates, Consumer Staples And Stock Index

Last week, long term interest rates continued to rise. 10 year Treasury bond’s yield is now above 3%, a much touted psychological level: 

Short term interest rates also rose. The following table shows how T-Bill, money market fund and brokered CDs rates for 3 month and 1 year: 

Security Annualized Yield
Prime Money Market (Vanguard Prime MM) 1.88%
3 Month Treasury Bill 1.9%
3 Month CD 1.8%
1 Year Treasury Bill 2.36%
1 Year CD 2.25%

We again observe that Treasury Bills’ yields are higher than their CD equivalent, somewhat unusual as T-Bills are considered to be the safest and thus should yield less. 

All of these are thought to spell trouble for rate sensitive stocks. 

Rate sensitive stocks in trouble

The following table compares S&P Consumer Staples sector ETF (XLP), Utility sector ETF (XLU), REITs (Vanguard REITs ETF VNQ) and S&P 500 (SPY). These sectors are the most sensitive to interest rates:

As of 5/18/2018
Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR 10Yr Sharpe
XLP (Consumer Staples Select Sector SPDR ETF) -11.9% -7.0% 2.8% 6.2% 8.6% 0.6
XLU (Utilities Select Sector SPDR ETF) -5.6% -1.7% 7.1% 7.8% 5.9% 0.31
VNQ (Vanguard REIT ETF) -7.7% -1.0% 3.0% 3.9% 5.6% 0.16
SPY (SPDR S&P 500 ETF) 2.5% 17.2% 10.7% 12.5% 8.9% 0.43

XLP has the worst year to date return while all of the 3 rate sensitive sectors have negative YTD returns, compared with SPY’s 2.5%.

US Sectors Trend 05/17/2018

Description Symbol 13 Weeks 26 Weeks 52 Weeks Trend Score
Consumer Staples XLP -8.97% -7.59% -6.45% -5.06%
Telecom IYZ -3.02% -2.67% -13.16% -4.52%
Utilities XLU 0.12% -10.68% -1.72% -3.69%
Healthcare XLV -1.45% 2.87% 13.0% 3.29%
Industries XLI -2.3% 7.07% 17.31% 4.23%
Materials XLB -0.76% 3.95% 17.6% 4.61%
Financial XLF -2.19% 8.88% 24.17% 6.32%
Consumer Discretionary XLY 0.3% 13.8% 20.34% 7.13%
Technology XLK 3.44% 9.55% 28.15% 8.6%
Energy XLE 16.91% 19.77% 21.89% 13.09%

The cyclical sectors like energy, technology and consumer discretionary are the top 3 performing sectors. 

What’s worse, some of the well known names in consumer staples sector have lost more than 20% at some point of time this year, a level often used to define a bear market territory. The following chart shows the stock prices for Proctor & Gamble (PG), Philip Morris International (PM) and Kimberly-Clark (KMB): 

On the other hand, small cap stocks, often considered to be more risk sensitive, are doing the best among all of the nine styles of stocks: 

US Stock Style Trend as of 05/17/2018

Description Symbol 13 Weeks 26 Weeks 52 Weeks Trend Score
Russell Smallcap Growth IWO 6.33% 12.26% 25.82% 9.69%
Russell Smallcap Index IWM 6.05% 10.07% 20.96% 8.36%
Russell Smallcap Value IWN 5.71% 7.57% 16.0% 6.92%
Russell Largecap Growth IWF 1.14% 8.39% 23.24% 6.85%
Russell Midcap Growth IWP 1.99% 8.49% 21.1% 6.74%
Russell Largecap Index IWB 0.28% 6.22% 17.16% 4.98%
Russell Midcap Indedx IWR 1.24% 5.84% 15.23% 4.72%
Russell Midcap Value IWS 0.58% 3.71% 10.64% 3.12%
Russell Largecap Value IWD -0.64% 3.98% 11.12% 3.09%

We offer two reasons for the above behavior:

  • Consumer staples stocks are usually more predictable. They also offer higher yields. In a normal time, these stocks are viewed as defensive as their business is less disrupted in an economic downturn. However, in the current environment where interest rates are rising out of historically low, it’s much easier to deduce that these ‘defensive’ stocks are no longer competitive as bonds are offering competitively higher yields now. Furthermore, these companies all report some form of pricing pressure, indicating the upcoming profit margin decline. 
  • On the other hand, investors are reluctant to give up high growth stocks. They are pinning their hopes on the continuous high growth rate for other companies such as those in technology. They hope that both the recent tax cut and trade deals can probably help US companies to rake in more profits. Though large company stocks are at a very high valuation level, they now turn to smaller companies and hope they can continue to contribute to the growth in this bull market. 

Granted, online shopping is now offering a way for consumers to be more price sensitive and less brand royal (the so called ‘Amazon effect’), it still doesn’t explain the magnitude of this sudden decline. 

Regardless, the recent noticeable weakness in consumer staples stocks might be a precursor to a more serious decline in the future as investors are becoming less certain on the more stable and ‘certain’ companies. Instead, they now rely on hope on more speculative companies to deliver ever higher expected growth. In such an environment, when there is a first sign of earnings slowdown, these investors will be the first to jump ship by dumping stocks. 

On a final note, in the long term, consumer staple stocks offer higher returns but with lower risk. In the following, we look at the returns of  FDFAX (Fidelity Select Consumer Staples) that has one of the longest data (since 1987): 

Consumer staples vs. stock index (S&P 500):
Ticker/Portfolio Name 1Yr AR 3Yr AR 5Yr AR 10Yr AR 15 Yr AR 20 Yr AR
FDFAX (Fidelity Select Consumer Staples) -16.7% -1.9% 2.9% 6.4% 9.5% 7.2%
VFINX (Vanguard 500 Index Investor) 16.8% 10.6% 12.4% 8.8% 9.5% 6.5%

So consumer staples stocks not only offer higher returns but they have less volatility too. Now that their prices have come down a bit, these stocks are becoming more valuable. 

Market Overview

More than 93% of S&P 500 companies had reported earnings for Q1 2018 on last Friday. The blended earnings growth is 24.5%, the highest since 2010. Analysts are all optimistic and expect double digit earnings growth rates for the next several quarters. Again, analyst’s expectation will always be high until some sign of slowdown materializes. Meanwhile, we are now getting closer to the summer season that’s traditionally more likely to be weak for stocks. We don’t have a future crystal ball to offer but what we can do is to manage our risk and stick to the investment plan. 

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

Now that the Trump administration has been in the office for more than a year, the economy and financial markets are in general still in a good shape. Whether the economy will continue to benefit from the supposedly trickle down of the tax cut, the deregulation, and the promised infrastructure spending remains to be seen.  On the other hand, stocks continued to ascend, regardless of the progress. Looking ahead, however, we remain convinced that markets will experience more volatilities at some point when reality finally sets in. 

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 about 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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