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

Regular AAC (Asset Allocation Composite), SAA and TAA portfolios are always rebalanced on the first trading day of a month. the next re-balance will be on Monday June 1, 2020.

Please note: As of March 1, 2020, we officially phased out our old rebalance calendar for both SAA and TAA. They are now always rebalanced on the first trading day of a month. 

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.

Asset Trends Review

The fast and furious market actions in the past three months have left many stunned and confused. As this moment, major US stock indexes have recovered most of their losses. Nasdaq 100 index even has a positive year to date return. On the other hand, economic news are all dire: 33 millions of American have made unemployment, U.S. GDP contraced 4.8% in the first quarter.  There seems to be some major disconnect here. It’s thus a good time to overview major asset trends. 

Risk asset trends are still down

The following table shows major asset trend scores (as of 5/8/2020): 

Asset Symbol Trend Score
Gold GLD 11.78%
Intermediate Treasuries IEF 7.15%
Mortgage Back Bonds MBB 3.22%
Total US Bonds BND 2.84%
Treasury Bills SHV 0.78%
US Credit Bonds IGIB 0.5%
Municipal Bonds MUB 0.5%
International Treasury Bonds BWX -0.37%
US Stocks VTI -1.15%
US High Yield Bonds JNK -4.0%
Emerging Market Stks VWO -5.72%
Emerging Mkt Bonds PCY -6.39%
International Developed Stks VEA -7.28%
US Equity REITs VNQ -10.13%
International REITs RWX -13.47%
Commodities DBC -14.93%

So all major risk assets including US stocks, Emerging market stocks and international developed stocks, REITs, high yield bonds and commodities all still have negative trend scores. We are far from being out of wood. 

Trend dispersion

The first interesting thing to note is that for S&P 500 index, its top 5 holdings (Microsoft, Apple, Amazon, Facebook and Google) now take up more than 20% of its overall market capitalization:

S&P 500 top 10 holdings (as of 5/8/2020):

Name Weight
Microsoft Corporation 5.80%
Apple Inc. 5.33% Inc. 4.08%
Facebook Inc. Class A 2.10%
Alphabet Inc. Class C 1.71%
Alphabet Inc. Class A 1.71%
Johnson & Johnson 1.61%
Berkshire Hathaway Inc. Class B 1.42%
Visa Inc. Class A 1.30%
JPMorgan Chase & Co. 1.20%

These 5 companies are all in technology sector and they are in Nasdaq. They also take up more than 45% in Nasdaq 100 index (QQQ). So no wonder with the strength of the these 5 companies, Nasdaq 100 is now positive YTD and S&P 500 (SPY or VFINX) only lost -8.7% YTD even in the current unprecedented health and economic crisis. 

But other stocks, small and mid cap stocks fared much worse: 

So it’s all headline good news among bad undercurrents. 

Furthermore, utilities sector, a sector considered to consist of defensive and stable businesses that are sensitive to interest rates and credit markets, is still below its 200 day moving average: 

So, majority of stocks are still in a down trend or at best in a weak uptrend.

Credit markets

With the Federal Reserve’s strong intervention in credit markets, both interest rates and high yield bond markets are functioning well:

!0 Year Treasury bond yield is at 0.69%, still at the lows: 

Yield (interest rate) spread between high yield bonds and Treasury bonds of similar maturity has dropped from the recent high. The higher the spread, the more risk bond investors perceive in the credit market. Notice, the recent high is much smaller than that made during the 2008 financial crisis. That was mainly because of the swift and strong intervention of the Fed and the government. 

Stock valuations are back to historical high range

After strong recovery from their March lows, US stocks are now again way overvalued. See the following Shiller CAPE10: 

Interested readers can find more info from Market Indicators page. 

To summarize: 

  • Stocks are still in downtrend,
  • Even though some large cap indexes such as Nasdaq 100 is now in uptrend, markets are non-uniform and majority of stocks are still in a downtrend. 
  • Bond markets are functioning well mostly because of the Federal Reserve’s intervention. However, without much underlying companies’ business improvement, this can’t last for too long. In fact, this concern is probably shown up in the weakness in utility companies’ stocks: if credit markets are very supportive to usually credit sensitive utility companies, the weakness of these companies can only be explained by their fundamental business weakness (concerns). 
  • Stock valuation is still very high. 

Even though financial markets are forward looking, the above data do not support an aggressive and fast market recovery.  Our tactical strategies (Asset Allocation Composite (AAC)  and Tactical Asset Allocation(TAA)) are based on the above factors to make risk asset allocation decision. At the moment, they  are still conservative. 

Market overview

Investors have high hope on reopening economy after this phase of Covid-19 pandemic. However, our concerns remain, not only because of the slowing flattening curve of the pandemic in the U.S., also because of still not well developed process of containing future small/local outbreaks. As we mentioned in early March, what’s more important now is the process/mechanism we have developed from the previous/current phase(s). By now, given the condition that so far we have no effective prevention/cure medicines, we would have expected that we should have good processes/resources to detect (test), isolate (contain) and better cure/care infected patients. Unfortunately, it looks like that we are still lack of testing kits and resources and effective ways to do contact tracing and isolation (though the U.S. has improved significantly). We believe there are two major risk scenarios because of this: the possible second wave of infection and a long uneven period of many small pockets of outbreaks. In the second scenario, people will be still too cautious to consume and work. In both cases, the economy will be damaged more permanently. 

At the moment, financial markets apparently assume that once the economy reopens, the current economy weakness (GDP recession, high unemployment) will be temporary. But this seems to be a very risky assumption. 

In times like this,  we again emphasize the following: 

  • For strategic allocation (buy and hold) investors, ignore the current market behavior. Remember, as what we have emphasized numerous times, when you choose and commit to a strategic portfolio, you essentially know and commit that your investment horizon (or the time you need to utilize this capital) is 20 years or longer. As we pointed out, if your investments are those diversified (index) funds such as an S&P 500 index fund (VFINX, for example), you know your money is in some solid ‘business’ that eventually (20 years later) will deliver some reasonable returns. As long as you are comfortable with this thesis, you should sit tight and forget about the current gyration.
  • For tactical investors, again, you have to ignore the current market noise. Furthermore, you should follow your strategy rigorously, especially in a time like this. Human emotion, both optimistic and pessimistic, and human desire, both greedy and fearful, are your worst enemies. This has been shown to be true time and time again.

For more detailed current market trends, please refer to 360° Market Overview.

In terms of investments, stocks are somewhat cheaper. Investors should not be swayed by the current market volatility and economic distress, instead, they should stand ready to take advantage of the opportunities. For most Americans, we offer the following Winston Churchill’s remark made in the darkest days of World War II: “The Americans will always do the right thing, but only after they have tried everything else.” As a country, the US (and the rest of the world) will get over this, as always, even after stumbles. The past development has been very supportive to our optimistic long term view so far. 

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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