February 1, 2021: REITs And Major Asset Trends | Better Financial Future -- MyPlanIQ

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 March 1, 2021.

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.

REITs And Major Asset Trends

In this newsletter, we review major asset trends and discuss REITs in more details.

Major asset trends: almost everything is up

Though we are probably still in the Covid-induced recession at the moment, the effect of the ultra strong stimulus on asset prices is unmistakable: virtually everything has been up so far:

Major Asset Classes Trend (as of 01/29/2021)

Description	Symbol	4 Weeks	52 Weeks	Trend Score
Emerging Market Stks	VWO	3.13%	25.76%	13.07%
US Stocks	VTI	-0.33%	20.7%	10.34%
International Developed Stks	VEA	-0.72%	12.32%	9.43%
Commodities	DBC	3.33%	4.18%	9.13%
International REITs	RWX	-1.32%	-10.32%	4.64%
US High Yield Bonds	JNK	-0.5%	4.91%	2.78%
International Treasury Bonds	BWX	-1.25%	7.77%	2.58%
US Equity REITs	VNQ	0.04%	-5.8%	2.57%
Emerging Mkt Bonds	PCY	-1.37%	-0.43%	1.9%
Municipal Bonds	MUB	0.34%	3.76%	1.77%
US Credit Bonds	IGIB	-0.81%	4.65%	1.05%
Mortgage Back Bonds	MBB	0.15%	3.46%	0.89%
Total US Bonds	BND	-0.86%	4.71%	0.66%
Gold	GLD	-3.22%	15.59%	0.53%
Treasury Bills	SHV	-0.01%	0.64%	0.13%
Intermediate Treasuries	IEF	-1.09%	5.16%	0.03%

This is perhaps the most ‘bullish’ up trend one can expect: stocks are leading the way and then followed by risky bonds, then by ‘safe’ Treasury bonds and bills.

Interestingly, after one month has passed in 2021, risky stock styles, aka, small stocks are now finally leading:

US Equity Style Trend (as of 01/29/2021)

Description	Symbol	4 Weeks	52 Weeks	Trend Score
Russell Smallcap Growth	IWO	4.78%	42.6%	23.56%
Russell Smallcap Index	IWM	4.85%	29.87%	21.1%
Russell Smallcap Value	IWN	5.05%	16.03%	18.61%
Russell Midcap Growth	IWP	-0.38%	33.45%	13.39%
Russell Largecap Growth	IWF	-0.79%	34.13%	12.08%
Russell Midcap Indedx	IWR	-0.29%	17.56%	10.64%
Russell Largecap Index	IWB	-0.79%	19.67%	9.47%
Russell Midcap Value	IWS	-0.24%	6.62%	8.72%
Russell Largecap Value	IWD	-0.94%	3.98%	6.6%

Among US stock sectors, cyclic and risky sectors are leading over ‘defensive’ sectors:

US Sectors Trend (as of 01/29/2021)

Description	Symbol	4 Weeks	52 Weeks	Trend Score
Technology	XLK	-0.84%	36.94%	13.4%
Consumer Discretionary	XLY	0.77%	30.73%	11.8%
Materials	XLB	-2.42%	25.34%	9.69%
Healthcare	XLV	1.4%	18.08%	8.17%
Financial	XLF	-1.8%	-0.8%	7.32%
Telecom	IYZ	1.89%	7.77%	6.46%
Industries	XLI	-4.27%	6.7%	5.91%
Energy	XLE	3.75%	-21.34%	5.43%
Consumer Staples	XLP	-4.98%	4.33%	1.07%
Utilities	XLU	-0.88%	-6.61%	-0.83%

So despite the highly volatile and losing final days of January this year, the asset uptrends are still intact.

Economy wise, no one has declared the end of the current recession though it’s likely if the GDP continues to grow this quarter, the recession will be officially declared to be over. At the moment, as we are still in the middle of the pandemic, it’s still too early to tell for now.

The following chart shows two important metrics: housing start and unemployment rate. From the chart, we see that the unemployment rate is still higher than a year ago while housing start has been positive from a year ago for a while:

What happened to REITs?

2020 was a year that was chaotic for REITs (Real Estate Investment Trusts), an important asset class for our asset allocation portfolios. As many companies were forced to work from home and various service businesses such as travel, hotel/lodges are restaurants were locked down or limited, some REIT sectors were severely impacted.

The following table shows the total return data of REIT sectors from REIT.com for 2020:

Observations:

FTSE NAREIT equity index lost -8% in 2020, compared with Vanguard REIT ETF VNQ’s -4.7% loss (see this).
Retails (including Shopping and regional malls), Lodging/Resorts, Offices REITs had biggest loss in 2020. Among residential sector, apartments subsector lost -15% while single family homes actually returned positively (6%).
On the other hand, data centers, self storage and industrial REITs were positive in 2020.

For those sectors that have incurred big loss last year, many of them will recover strongly this year. This includes lodging/resorts and health care. Even though work from home might become more popular among some companies, we believe that their effect on REIT overall index will not be significant.

We are optimistic on REITs: the still ultra low interest rates are strong stimuli for REIT businesses as their borrowing cost is extremely low for now. Furthermore, as the pandemic is finally under control, businesses will return and people will start to travel again. The lodging/resorts REIT will for sure stage a strong comeback. In the event the overall economy is out of recession, one can expect REITs will recoup most of its loss this year.

Market overview

One can say that the Gamestop/AMC phenomenon is just another individual/retail populists’ revolt against establishment (hedge funds or institutions) in financial markets. Regardless whether you agree or disagree with the movement, one thing is certain: the social and now financial events are calling for a change, especially in the era of the ever more connected world enabled by new technology. Unfortunately, as new technology is rapidly taking a hold in the society, one can only expect to see more and more such upheavals in the future.

On the other hand, we believe this calls for a more systematic and rigorous way to investing, especially in a more speculative and volatile market that’s been highly elevated. It’s one thing to be a sideline spectator, being amused with these events. It’s the other to be an actual participant who will, in the end, very likely get hurt once the speculative wave recedes. We have seen this movie before.

The earnings reports for Q4 2020 continued to pour in: as of last Friday, with 37% of S&P 500 companies reporting, the blended earnings decline for the S&P 500 was -2.3%, better than two weeks’ -4.7%, and much better than -9.2% expected on 12/31/2020. At the moment, we are still firmly in an up trend, though in a much more volatile one.

Regardless, we reiterate 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 now reached another high. For the moment, we believe it’s prudent to be cautious while riding on market uptrend. 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.

Enjoy Newsletter

How can we improve this newsletter? Please take our survey

–Thanks to those who have already contributed — we appreciate it.

Latest Articles

Disclaimer:

Any investment in securities including mutual funds, ETFs, closed end funds, stocks and any other securities could lose money over any period of time. All investments involve risk. Losses may exceed the principal invested. Past performance is not an indicator of future performance. There is no guarantee for future results in your investment and any other actions based on the information provided on the website including, but not limited to, strategies, portfolios, articles, performance data and results of any tools. All rights are reserved and enforced. By accessing the website, you agree not to copy and redistribute the information provided herein without the explicit consent from MyPlanIQ.