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 Thursday July 1, 2021. 

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.

Resuming Growth Trends Chaotically?

The current financial markets are somewhat confusing and chaotic: investors seem to adopt and abandon growth/value stocks and large/small stocks randomly. Let’s review the recent asset trends. 

Raging commodities & dumped Treasury bonds

For the very first time since many years ago (well since 2007?), commodities are finally seeing their days, rising on the top among major assets’ trend ranking: 

Major Asset Classes Trend (as of 6/25/2021): Table 1

Description Symbol Trend Score
Commodities DBC 21.0%
US Equity REITs VNQ 16.33%
US Stocks VTI 15.63%
Emerging Market Stks VWO 12.6%
International Developed Stks VEA 12.26%
Inflation Protected Bonds TIP 2.04%
Total US Bonds BND -0.25%
10-20 Year Treasury Bonds TLH -3.16%

The above table shows a fast growth driven risk appetite in a rising inflation environment. It’s of course not hard to understand this as global (at least the US) economy is now recovering strongly while the Covid pandemic is more and more contained.

However, commodities have shown their typical unstable trend, it’s been rising and falling along the way for the past 12 months, compared with US stocks: 

To be more precise, commodities (DBC) really started to overtake US stocks (VTI) in late April, just about two months ago. 

A close up look at the following chart shows that long term Treasury bonds (so called ‘safe’ asset or an asset often shows investors’ flight to safety attitude) actually has started to recover since mid March: 

Among commodities, oil price is the biggest factor: 

Commodities Trend (as of 6/25/2021)

Description Symbol 52 Weeks Trend Score
US Oil USO 83.66% 34.37%
Energy DBE 73.18% 29.36%
Natural Gas UNG 36.13% 24.67%
Commodity DBC 57.59% 21.0%
Base Metals DBB 48.19% 13.06%
Agriculture DBA 35.49% 9.67%
Silver SLV 45.4% 9.0%
Precious Metals DBP 4.75% -0.79%
Gold GLD 0.03% -1.69%

Oil price almost doubled in the last one year. Everything other than Gold is up. Base metals and agriculture ETFs (BBB and DBA) have also rose strongly as the pandemic has greatly limited supplies and transportation, thus forcing prices rise. 

The price of gold is more affected by inflation expectation, not much by the actual inflation. The depressing gold price indicates that investors expect a rising inflation in the near future. This is corroborated by the strong inflation protected bond price (TIP), shown in Table 1 above. 

Note that it’s possible to see gold price even rises in a rising rate environment. This usually happens in the late stage of a rising rate period. When that happens, it signals that investors are now believing rates will soon start to fall. 

Growth or value? Large or small?

Let’s first look at the trend scores of stock styles: 

US Equity Style Trend: (as of 6/25/2021)

Description Symbol 52 Weeks Trend Score
Russell Smallcap Value IWN 85.55% 24.92%
Russell Smallcap Index IWM 71.47% 20.25%
Russell Midcap Value IWS 58.76% 17.7%
Russell Midcap Indedx IWR 54.45% 16.74%
Russell Smallcap Growth IWO 57.3% 15.49%
Russell Largecap Growth IWF 44.9% 15.32%
Russell Midcap Growth IWP 46.37% 15.19%
Russell Largecap Index IWB 46.5% 15.01%
Russell Largecap Value IWD 47.84% 14.56%

We all know that markets underwent a growth to value rotation recently, but now this rotation seems to be over (?): 

So starting in early last month, growth stocks have risen strongly. It’s likely that investors are again in favor of growth stocks. 

Similarly, large stocks have now recovered back and poised to overtake small stocks since mid March: 

So it does look like the rotations from growth to value and from large to small are in jeopardy: maybe the go go low rate, large growth time is back. 

Back to tech?

The following chart compares the famous ARK Innovation ETF (ARKK) with S&P Tech sector (XLK) and financial sector (XLF): 

ARKK has risen more than 25% from its low and XLK (tech) has now also compared more favorably than a typical value sector like financials (XLF). 

A final thrust before the big fall? 

The above un-rotation seems to be in progress. But it does seem this is a rather speculative and chaotic chase. Well, in a market top, such frenzy speculative actions are usually rampant. A possible, though a very subjective,  guess of ours is that we might be experiencing a final thrust to another record high in stocks before a big correction or a fall. This will come along with declining rates (thus rising bond prices) to propel the speculative bubble to its fullest. Basically, the theory goes that in this final thrust, growth stocks, especially tech stocks, will again take the lead as economy recovery quickens and corporate earnings are expected (or reported) to be so rosy (we did have such a taste on the last quarter’s earnings reports) that the riskiest assets are in high demand while low interest rates are still supported by the Federal Reserve and the strongest many trillion dollar fiscal stimulus. 

This will eventually stop when inflation finally gets out of control or another pandemic related resurge happens again. 

Again, we want to point out the above is just a subjective prediction. As always, what counts is a strategy that can handle scenarios when such a prediction happens or more importantly when such a prediction fails or postpones indefinitely. We believe it’s more important to have a strategy that can handle all possible scenarios reasonably well instead of a bet-it-all gambling strategy. For those who are not familiar with our philosophy, please refer to our investment methodology. 

Market Overview

As described in the above, markets are again becoming rosy and reaching new highs almost daily. In addition to the possible run away inflation discussed above, we want to point out that the pandemic is not over. There are still quite some unknowns. Specifically, UK is now experiencing some lockdown again while new variants of virus are reported. These new virus variants might present challenge to existing vaccines. This is definitely a factor more and more people want to forget (well, it’s been one and half year and counting). But a likely factor indeed, regardless of how subjectively you want to ignore it. 

We are again cautiously optimistic and 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 is still extremely high by historical standard. 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.

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