October 8, 2018: Asset Trend Review

Oct 9, 2018 | Asset-Allocation, Bonds, Economy, Feature, Gold, Headline, Income, Investments, IRA, Markets, Mutual-Funds, Newsletter, Retirement

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For regular SAA and TAA portfolios, the next re-balance will be on Monday, October 29, 2018. You can also find the re-balance calendar for 2017 on ‘Dashboard‘ page once you log in.

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.

Please note that we now list the next re-balance date on every portfolio page.

Asset Trend Review

Just right after we proclaimed a boring US market last week, US bonds, especially long term bonds, started to drop while US stocks showed some considerable weakness. In this newsletter, we want to review them in more details. 

Major asset trends

Virtually, other than US stocks and commodities, all other major assets are in negative downtrend. US high yield bonds are now also teetering to the downside: 

Major Asset Classes Trend

10/08/2018

Description Symbol 1 Week 4 Weeks  52 Weeks Trend Score
Commodities DBC -0.33% 6.04% 19.75% 7.43%
US Stocks VTI -1.57% -0.45% 14.72% 5.28%
Treasury Bills SHV 0.04% 0.14% 1.46% 0.59%
US Equity REITs VNQ -0.75% -3.33% -0.28% 0.31%
US High Yield Bonds JNK -1.44% -0.52% 0.68% 0.28%
Municipal Bonds MUB -0.58% -0.88% -1.05% -0.74%
Total US Bonds BND -0.8% -1.3% -2.23% -1.35%
International Developed Stks VEA -3.09% 0.2% -0.21% -1.96%
Emerging Mkt Bonds PCY -1.7% 0.52% -6.23% -2.44%
International Treasury Bonds BWX -1.1% -1.93% -2.63% -3.46%
International REITs RWX -3.12% -3.6% -0.75% -4.44%
Gold GLD -0.03% -0.54% -7.81% -5.04%
Emerging Market Stks VWO -4.4% -0.59% -8.95% -6.97%

This has been a familiar picture for a while: US assets were the only ones that had shown strength. The recent rapidly rising bond yields have knocked yield sensitive US REITs almost out of their up trend. Commodity prices are driven higher mostly because of the rising oil and energy prices. In fact, other than energy, the rest commodity prices have actually been falling: 

Commodities Trend

10/08/2018

Description Symbol 1 Week 4 Weeks  52 Weeks Trend Score
US Oil USO -1.69% 10.34% 56.8% 18.51%
Energy DBE -1.08% 8.63% 46.22% 16.65%
Commodity DBC -0.33% 6.04% 19.75% 7.43%
Agriculture DBA 2.35% 1.34% -7.96% -2.78%
Gold GLD -0.03% -0.54% -7.81% -5.04%
Base Metals DBB -0.89% 4.85% -16.58% -7.48%
Silver SLV -0.66% 1.65% -15.54% -7.68%
Precious Metals DBP -0.12% -3.29% -12.84% -8.12%

Rapidly rising bond yields

Last week’s market gyration perhaps was triggered by rapidly rising bond yields, especially those of long term bonds. Here, we see that only short term bonds are still staying positive: 

Fixed Income Assets Trend

10/08/2018

Description Symbol 1 Week 4 Weeks  52 Weeks Trend Score
Bank Loans BKLN -0.04% 0.73% 3.96% 1.7%
Floating Rate FLOT 0.04% 0.22% 2.36% 0.95%
Treasury Bills SHV 0.04% 0.14% 1.46% 0.59%
High Yield JNK -1.44% -0.52% 0.68% 0.28%
Short Term Muni VWSUX -0.06% -0.12% 0.65% 0.25%
Short Term Treasury  SHY -0.07% -0.16% -0.13% -0.02%
Short Term Credit IGSB -0.25% -0.41% -0.3% -0.21%
High Yield Muni VWAHX -0.63% -0.95% 0.8% -0.24%
Interm Term Muni VWIUX -0.44% -0.7% -0.56% -0.41%
Long Term Muni VWLUX -0.62% -0.95% -0.15% -0.54%
MBS Bond MBB -0.83% -1.24% -1.83% -1.19%
Intermediate Term Credit IGIB -0.76% -1.35% -2.42% -1.31%
US Total Bond BND -0.8% -1.3% -2.23% -1.35%
Inflation Protected TIP -0.88% -1.82% -1.31% -1.69%
Long Term Credit LQD -1.4% -1.62% -3.59% -1.95%
Intermediate Treasury IEF -0.94% -1.97% -3.94% -2.15%
Emerging Mkt Bonds PCY -1.7% 0.52% -6.23% -2.44%
10-20Year Treasury TLH -1.53% -3.05% -5.69% -3.44%
International Treasury BWX -1.1% -1.93% -2.63% -3.46%
International Inflation Protected WIP -0.44% 0.81% -4.26% -3.63%

The ten year Treasury note’s yield had a big jump last week, rose way above the so called psychological 3% level:

The immediate impact of the higher interest rates is that now mortgage rates are rising fast: the 30 year fixed mortgage rate is now at 4.7%, a five year high: 

This is putting pressure to housing market, which is a big part of the US economy. 

In the meantime, high yield bonds are falling off its recent high: 

Stock market internals

Perhaps the most troublesome indicators are US stock market internals: recently, much more stocks reached their 52-week lows than those reaching their 52-week highs. The NYSE stocks new high vs. new low ratio is now at 0.16, meaning for every stock making 52-week new highs, more than 6 stocks made their 52-week lows, compared with 2.3 of their 200-day average:

 The number of stocks in NYSE that are above their 200 day moving averages is also dropping:

Granted, these indicators are still not at some distressed levels. In fact, what’s really worrisome is that this is happening when major stock indices are just within 2% from their highs, indicating that the recent indices’ strength was mostly driven by very few stocks and the broad market is much weaker than it seems.  Maybe the worse is yet to come. 

Discussions

The above troubling development is happening in the backdrop of historically high stock valuation and historically low bond yields. Though US stocks and economy are doing well on surface, the above analysis should serve as a reminder that the risk in financial market is actually very high instead. 

Notice that it has been always our position that our investment management should not rely on any subjective prediction. Even with the above data, we have no intention to forecast an imminent turn of current major trends. Our analysis is by no means objective and it’s imprecise  and untested in rigorous settings. Regardless of the current situations, our methodology remains the same: when it comes to actual portfolio rebalance, we should rely on the systematic strategies that are precise, mechanical, rigorously tested and backed with strong intuition. On the other hand, the purpose of the above analysis is to help investors to set proper expectation and better prepare for upcoming market volatility. We further believe that the macro analysis of valuation, market internals and major asset trends can be a guide to make sure one’s exposure in risk assets (stocks, commodities, REITs, high yield bonds) fits to his/her risk tolerance. At the moment, we believe that investors should pare down excessive (if any)  exposure to risk assets to a comfortable level that can withstand a possible 30%-50% correction. 

Market Overview

We are now approaching the third quarter earnings season. In the current market condition as discussed above, any indication of slowing down in the last quarter or projection in the future earnings can only exacerbate the weakness. Seasonally, October has been a very volatile month. As always, stay the course and maintain a reasonable level of risk exposure.  

For more detailed asset trend scores, please refer to 360° Market Overview. 

In terms of investments, U.S. stock valuation is at a historically high level. It is thus not a good time to take excessive risk. However, we remain optimistic about U.S. economy in the long term and believe much better investment opportunities will arise in the future. 

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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