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 November 2, 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 Trend Review

We just had a rebalanced on October 1 last week. Amid so many dramas in the presidential election, the Covid pandemic and economic developments, t’s a good time to review the current situation. 

Major asset trends are up

Virtually, all major asset classes are in up trend: 

As of 10/02/2020 (see 360° Market Overview), the following table shows the trend scores of major asset classes: 

Symbol Trend Score
VTI 12.83%
VWO 10.16%
GLD 10.01%
VEA 8.03%
VNQ 5.86%
JNK 2.81%
MUB 2.11%
BND 1.13%
DBC -0.91%

Market internals are finally getting more uniform: for example, both ‘stable’ utility stocks and more ‘speculative’ small cap stocks are pointing up:

On 360° Market Overview, you can find more trend score information on stock styles and sectors. Other than energy sector, all other stock segments now possess positive trend scores. 

Covid19 pandemic and its impact on financial markets

It’s still a big struggle for most western countries especially the US and some European countries to contain the virus. However, there are two major new developments since March, when the pandemic first seriously affected both life and economy: 

  • Hospitalization and death rates are stable or trending down

Some plausible explanations for this include: better diagnostic, tracing and care on cases; better life saving medicines and process; the virus hasn’t mutated to become more serious. 

For investors, what’s more important is that it does look like the economy can withstand this pandemic by 

  • Better economic activity handling and strong fiscal and monetary support

Unlike the panic and shutdown incurred in March, we have learned a better way to handle the pandemic economically, even if the second or the third wave (depending on your own definition) does occur in the fall. As more companies have had work-from-home practice and digital strategies in place and, the central banks and the governments continue to pledge ‘whatever it take’ support to economy, financial markets seem to believe that, going forward, the economy will not be as seriously damaged as in the first wave (in March). 

Another interesting chart is the following Retail and Food Service Sales economic indicator.  It’s been an excellent barometer to the economy health of a consumption based economy like the one in the US. It has recovered strongly (because of government pandemic stimulus) since March: 

We want to point out that the above discussion by no means indicates our rosy prediction on the pandemic. It’s still possible that the next wave (if any) of the pandemic will cause a great harm to human health and society. However, as the financial markets (or asset prices) are indeed strongly propped up by the monetary policies and fiscal support , a better or more orderly economic activity management will be more likely to stabilize financial asset prices. In fact, it will encourage more speculation in financial markets. 

Finally, the following three charts should suffice to show us why the monetary (Federal Reserve) and fiscal Federal deficits offer strong support to asset (S&P 500 for example) prices:

Total federal reserve banks’ asset rose in tandem with S&P 500 price: 

CBO projected that the federal budget deficit will be the largest short fall relative to the size of the economy since 1945 (i.e. the World War II): 

We also want to point out that the federal budget deficit has actually increased since 2015. No wonder stocks are doing ‘fantastically’: companies took the tax cut and bought back their stocks while the government incurred more debts!

It’s probably not that far off to say that current asset prices are mostly due to the rising debts from the governments. 

Market overview

Financial markets are resilient or stubborn to hang on to the up side, regardless of the presidential election news, the president’s health or any other form and shape. We are getting close to seasonally favorable period for stocks. Financial markets, as discussed in the above, are indeed extremely speculative. Interestingly, investors have abandoned yield seeking: many solid stocks in financial services (banks, for example) and utility sector are yielding 4% or more.  Growth stocks are still bid up. As stocks and bonds have been persistently near their record territories and they are extremely overvalued, we believe it’s only prudent to adopt more active or tactical strategies going forward. The eventual stop-reset break point will happen, it’s just the matter of when, not will. 

Again, we shouldn’t rely on our subjective opinion and should follow our strategies instead:   

  • 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 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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