March 8, 2021: The Not So Orderly Market Rotation Amid Rising Bond Yields

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The Not So Orderly Market Rotation Amid Rising Bond Yields

Well, it happened that fast: though general stock market indexes have not dramatically changed, some huge market disruption has been indeed on going. One can say we are now in a disorderly market rotation.

Big disruptions: long term bonds and high flying tech stocks

Let’s first take a look at some of the recent damages:

Virtually, other than floating rate bonds, all bond segments had a negative return in the last 4 weeks (as of 3/5/2021). See Fixed Income Asset Trend table on 360° Market Overview for more details:

Recent returns of some bond segments (as of 3/5/2021):

Ticker/Portfolio Name	1 Week Return*	YTD Return**	1Yr AR	3Yr AR	5Yr AR
TLT (iShares 20+ Year Treasury Bond)	-2.8%	-11.7%	-11.1%	7.8%	3.9%
LQD (iShares iBoxx $ Invst Grade Crp Bond)	-1.7%	-5.7%	-0.1%	7.2%	5.9%
VCIT (Vanguard Intermediate-Term Corp Bd ETF)	-1.1%	-3.5%	1.3%	6.8%	5.3%
JNK (SPDR Barclays High Yield Bond ETF)	0.4%	0.1%	6.6%	5.5%	7.1%
HYD (Market Vectors® High-Yield Municipal ETF)	0.4%	0.7%	-2.2%	4.3%	4.1%
BND (Vanguard Total Bond Market ETF)	-0.8%	-3.2%	-0.3%	5.2%	3.6%

US 10 Year Treasury Yield rose sharply:

So safe haven bonds are not that ‘safe’ at all! The only encouraging sign: high yield bonds (corporate and muni) still had a positive YTD (Year To Date) return.

Now let’s move to stocks. The following are the returns of some of high flying tech stocks and ETFs:

High flying FAANG, ARK ETFs and other stocks (as of 3/5/2021)

Ticker/Portfolio Name	1 Week Return*	YTD Return**	1Yr AR
TSLA (Tesla Motors, Inc.)	-11.5%	-15.3%	312.6%
FB (Facebook Inc Class A)	2.6%	-3.3%	42.7%
AAPL (Apple, Inc.)	0.1%	-8.4%	68.4%
AMZN (Amazon.com Inc)	-3.0%	-7.9%	55.9%
GOOG (Google, Inc. Class A)	3.5%	20.4%	59.9%
NFLX (Netflix Inc.)	-4.2%	-4.5%	38.5%
ARKK (ARK Innovation)	-10.2%	-6.0%	122.4%
ARKW (ARK Next Generation Internet)	-9.2%	-0.2%	132.0%
BPTRX (Baron Partners Retail)	-6.6%	-3.8%	121.6%

Looking at even more closely on Tesla, Zoom (ZM) and TeleDocs (TDOC):

These stocks have experienced a serious drawdown (from a max to a subsequent current low) of ranging from -20% to -50%! This must be a very painful correction for these stock holders!

Of course, many ARK ETFs now lost money year to date. Not surprisingly, Baron Partners fund BPTRX, mentioned in our last week’s newsletter, was hard hit in the last month so far!

Impact on major asset indexes

Fortunately, the current disorderly rotation hasn’t greatly affected many major asset indexes yet:

VTI: US stocks, VEA: foreign developed country stocks, VWO: emerging market stocks, VNQ: US REITs

As expected, the rotation is from large growth (IWF) to value (VTV) and small stocks (IWM):

To some extent, foreign stocks (developed country stocks VEA and emerging market stocks VWO) have lower valuation than US stocks. In fact, they do have higher momentum scores than the US stocks right now.

Impact on some of our portfolios

Well, the hardest hit portfolio in the current rotation is P Composite Momentum Scoring Industries ETFs (see January 25, 2021: Industry ETFs And ARK ETFs Portfolios):

Data are as of 3/5/2021. See Advanced Strategies for more details

The industries ETFs portfolio lost -6.8% year to date, mostly because of its holdings of ARK ETFs mentioned above. On the other hand, it looks like our global asset, factor and style ETFs portfolios have done some helpful rebalances to alleviate and/or take advantage of the current rotation. Our basic ETF portfolio like MPIQ ETF Allocation Moderate hasn’t be affected much because of its REIT and fixed income holding.

What to do

Again we would like to treat the current disruption as a live lesson. The following are some of our thoughts:

If you were lured to a high flying portfolio like P Composite Momentum Scoring Industries ETFs and promptly found out you were hit hard, you are probably not alone: we have received quite some inquiries on this portfolio recently. We can imagine there are quite some unhappy investors because of its huge drawdown (imagine you bought this portfolio at its peak on 2/12/2021, you would have lost more than 25% now!
However, as in adopting any investing strategy, the key determining factor is whether you can stick to a strategy for a sufficiently long period of time. As we have repetitively pointed out, you’ll need to be prepared to stay in a stock portfolio for as least 15 years or even longer to achieve its average return. This is perhaps the hardest part in investing: it’s much easier said than done: many just bailed, often in a worst time. The biggest issue here is that when a portfolio underperforms badly, investors aren’t sure whether the strategy is a bad strategy (thus, it will not recover back or will not recover back sufficiently enough, at least when compared with a market index) or it’s just a temporary (and thus expected) behavior. That’s why it’s extremely important to perform a thorough due diligence and have a good confidence and right expectation when eventually committed to the strategy.
In addition, what we can learn from investing in such a highly volatile portfolio is that one should be prepared to incur large loss. In fact, this portfolio’s largest drawdown is 30+% and investors might be prepared for an even greater drawdown as ARK ETFs were only recently introduced (and they are very elevated).
Finally, it’s also very telling that one should really allocate capital to portfolios carefully: the global portfolio P Composite Momentum Scoring Global Risk Assets or MPIQ ETF Allocation Moderate are much more diversified and they should be adopted as a core portfolio while others should only be used as supplementary portfolios.

Market overview

As discussed in the above, so far, the current market disruption is still contained to be a (disorderly) rotation. It hasn’t substantially changed major asset trends yet. However, if the current correction continues to develop, it could possibly become a major rebalance event. This is actually very plausible because of the elevated stock valuation, large stimulus and rapid recovery (thus induces rising inflation).

Unfortunately, so far, markets have proven to be very hard to predict and we don’t claim we possess any such an ability. What we can do is to adopt a sound strategy that can achieve a reasonable return in a long enough time frame and stick to it Our trend based asset allocation strategies will react to market behavior accordingly to manage risk.

Again, in the current very over-valued and over-extended markets, 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.

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