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 May 2, 2022. 

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.

Survivorship Bias, Sentiment And Market Internals …

We are always fascinated with things that are perceived as ‘obvious’ or ‘trivial’ by many. Examples include

Here is another one that can make you go ‘wow’: the story on the mathematician Abraham Wald who utilized survivorship bias in order to minimize bomber losses to enemy fire in World War II. Unlike most who paid attention to places where bullets were in those returning (survived) planes, Wald believed that the most vulnerable places were the places that had no bullet holes as the non-survived planes were most likely hit in those places and crashed! 

See this and this for more details. 

It’s well known in the investment world that one should take survivorship bias into account when looking at countless funds or strategies proposed ever. What’s important is not to pay too much attention to those who are loud and active in media at times as history will tell us ‘famous’ investors come and go, ‘good’ strategies fleeting. 

The other thing we should force ourselves to pay attention to is to look at forgotten ones instead. They often can offer us some valuable lessons. This includes many struggling or silent funds or strategies that people tend to shun away but maybe soon they’ll be surprised again to find out they shine again. A good example might be Hussman Strategic Growth Fund (HSGFX) that has returned double digit this year:

Hussman fund return compared with S&P 500 (VFINX) as of 4/22/2022:
Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR 15Yr AR
HSGFX (Hussman Strategic Growth) 11.8% 2.2% 4.9% 0.8% -4.5% -3.6%
VFINX (Vanguard 500 Index Investor) -9.8% 4.9% 15.6% 14.7% 14.1% 9.4%

John Hussman was very popular till after the 2008 financial crisis and then he was mostly dismissed by popular media. We are not for or against this fund but just remind people that taking a hard and long term observation is much more useful and beneficial. In fact, we are an admirer on Hussman’s logical analysis backed with strong data on long term financial markets. 

Sectors and other market internals

Conditions of financial markets (stocks and bonds) are terrible so far: in fact, both stocks and bonds have had close to double digit loss year to date: 

Major asset ETF returns (as of 4/25/2022):

Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR 15Yr AR
VTI (Vanguard Total Stock Market ETF) -10.7% 2.1% 15.2% 14.3% 13.9% 9.5%
BND (Vanguard Total Bond Market ETF) -9.1% -8.0% 0.9% 1.5% 1.8% 3.3%
VEA (Vanguard FTSE Developed Markets ETF) -9.7% -4.6% 6.8% 6.7% 6.7%  
VWO (Vanguard FTSE Emerging Markets ETF) -11.6% -14.8% 2.7% 4.7% 2.9% 2.7%
VNQ (Vanguard REIT ETF) -4.3% 16.8% 13.1% 9.4% 9.8% 6.5%

Even though it seems like everything has been down this year, in reality, there are several sectors that still return positively:

US Sectors Trend (as of 4/22/2022)

Description Symbol 13 Weeks 52 Weeks Trend Score
Energy XLE 22.02% 70.27% 23.88%
Consumer Staples XLP 4.32% 17.66% 8.15%
Utilities XLU 7.86% 15.89% 7.1%
Healthcare XLV 3.24% 10.12% 2.04%
Materials XLB 2.02% 5.85% 0.46%
Industries XLI -2.74% -1.39% -3.22%
Consumer Discretionary XLY -2.55% -0.38% -3.4%
Financial XLF -5.31% 4.52% -4.26%
Technology XLK -7.29% 1.19% -5.48%
Telecom IYZ -6.73% -11.38% -7.63%

The positive trend scores of Energy (and less so Materials) sectors are mostly due to rising energy (oil and others) prices. Consumer staples and healthcare, often perceived as defensive sectors, still have positive trend scores, indicating the recent weakness is still not wide spread enough. 

It’s also worth paying attention to utilities sector: this sector is often a leading indicator on a broad base stock market weakness. As of now, it’s surprising that utilities sector ETF XLU has a 3.7% year to date positive return. Possible reasons to explain this strength include 1). utility companies have actually benefited from the recent energy price rise and they will be able to raise prices in pace with inflation; 2). investors believe that inflation pressure is actually less serious or more transitory than it looks, thus utilities companies offer a good place to be in the current environment. We suspect that both are the factors behind its strength. Moreover, from the second table, we can see that REITs are still relatively strong, compared with VTI and other stock sectors. REITs are hard assets that often first experience weakness in a rising rate environment and then starts to stabilize as they often are able to raise rent to keep up with inflation. This atucally offers another support to these two reasons.

The other noticeable market internal is that so far, both large and mid cap value style stocks are mostly in positive up trends (style trend table on  360° Market Overview)

US Equity Style Trend (as of 04/22/2022)

Description Symbol 13 Weeks 52 Weeks Trend Score
Russell Largecap Value IWD 0.96% 6.02% 0.19%
Russell Midcap Value IWS 2.15% 4.79% 0.08%
Russell Smallcap Value IWN 0.7% -2.42% -3.1%
Russell Largecap Index IWB -2.36% 1.7% -3.31%
Russell Midcap Indedx IWR -0.21% -2.63% -3.93%
Russell Largecap Growth IWF -5.67% -2.58% -6.69%
Russell Smallcap Index IWM -1.81% -13.4% -7.91%
Russell Midcap Growth IWP -4.96% -15.44% -11.08%
Russell Smallcap Growth IWO -4.57% -23.54% -12.58%

Again, all of these are indicating markets are still not uniformly in a downtrend for now. However, as what we have warned before, in the current high valuation market that has heavily relied on ultra low interest rates, things can change dramatically very fast. So stay alert. 

Very bearish sentiment

The popular AAII Investor Sentiment Survey has shown an extremely bearish sentiment for a while now: 

This could signal a near term bottom though markets can continue to deteriorate from here too. 

Economic indicators

However, there are two major red flags in the recent economic development. Real Personal Income was slightly lower in the latest February figure, compared with year ago (17620 vs 17678):

This, coupled with most Covid-19 stimulus checks ending this month, can be problematic to the economy. Similarly, retailed sales also dipped in its latest (April) report compared with its last year’s figure: 

They both confirmed the fear that the economy is decelerating. 

Finally, we want to point out that our (Asset Allocation Composite (AAC) ) strategy does utilize some important economic indicators, along with major assets trends and some market internal indicators to decide its risk asset (stocks) exposure. This would answer many subscribers’ question on what’s different between our strategy and popular price timing strategies such as 200 day moving average (see November 15, 2021: Q&A On MyPlanIQ Strategies And Portfolios).

Market Overview

Earnings wise, so far so good as companies that have reported earnings have beaten expectation as an aggregate: based on Factset, as of last Friday, with 20% of S&P 500 companies reporting, the blended earnings growth rate for the S&P 500 is 6.6%, better than 4.7% expected on March 31,2022.

However, investors should be aware that we are likely at an inflection point of the end of the 40 year secular bond market that has seen globalization is rapidly reversed. Many popular or familiar investment strategies will unlikely to work well if this indeed turns out to be true, i.e. we are entering a new era where both inflation and interest rates are rising. Of course, as what’s said, somethings never change and somethings do change. We believe that a rigorous mind that follows a well planed strategy of strong intuition and empirical data support will prevail. 

Given the still very high valuation of stocks and bonds, it’s not impossible that the next downturn could result in a loss as deep as 50% to even 80%. It’s thus important to stick to good risk managed portfolios. We again advocate the following practice: 

  • 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.

Stock valuation has dropped somewhat. However, it is still very high by historical standard. For the moment, we believe it’s prudent to be extra cautious. However how serious a correction might be, we have confidence in the US economy in the long term and thus in the stocks in aggregate. We just need to manage through interim losses carefully.  

We again would like to emphasize that 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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