Dear Spartan Client,
“Everyone times the market. Some people buy when they have money, and sell when they need money, while others use methods that are more sophisticated.”
It’s an interesting question: Is everyone a market timer? OK, probably not everyone, but in some ways, the decline experienced in U.S. stocks this year highlights the difficulty that many market participants have in remaining patient as they go on a bottom-fishing expedition.
Timing the market is not a plan. Indiscriminate buying based on falling stock prices is not a plan. Often both of these disregard the fact that you might be wrong. In this month’s Note, we discuss how perceived opportunities can turn into traps without the proper plan to tell you when you’re wrong. It is an old adage to which we subscribe: “Stay humble or the market will force you to be.”
Below are the asset classes utilized in our portfolios and their model-driven exposure heading into July.
Square indicates no change month-over-month. Arrows indicate increase/decrease month-over-month. Adjustments can vary across Spartan Strategies depending on each Strategy’s objectives. What’s illustrated above most closely reflects allocation adjustments for the Spartan Growth Strategy.
Disclaimer: this note is for general update purposes related to the general strategy and approach of Spartan Planning portfolios. Every client’s situation including Risk Profile, Time Horizon, Contributions, and Distributions is different from other clients. Your exposure to any given asset class will depend on your goals, risk profile, and how tactical or passive your risk profile calls for. If there have been changes to your risk profile and/or goals or if you wish to discuss them in more depth, please contact your advisor.
At a Glance: Allocation Adjustments Heading Into July, 2022
U.S. Equities: Exposure will not change, as both the intermediate- and long-term timeframes remain in downtrends.
International Equities: Exposure will not change, as both foreign developed and emerging markets remain in downtrends across both timeframes.
Real Estate: Exposure will not change, as both the intermediate- and long-term timeframes remain in downtrends.
U.S. and International Treasuries: Exposure will not change and is at its minimum allocation due to downtrends across both timeframes.
Inflation-Protected Bonds: Exposure will not change and is at its minimum due to downtrends across both timeframes.
Short-Term Fixed Income: Exposure will increase to its max allocation, as it takes on exposure from gold. It continues to hold exposure vacated in previous months by equities, real estate, and longer-duration fixed income.
Alternatives: Exposure will decrease, as the long-term trend in gold turned negative, joining the intermediate-term trend.
Three potential macro catalysts for the recent trend changes:
- Past: The final revision to the Q1’22 gross domestic product report came out, and it shows that real GDP (inflation-adjusted) was -1.6% annualized. While the revision was small from the previous report, the composition changes were disappointing. Consumer spending on both goods and services was revised down significantly and offset by inventory accumulation, which is less than ideal. Building inventories for businesses in an environment with slowing spending is unhelpful for longer-term growth if it causes businesses to sell at discounted prices in a short period of time.
- Present: Several surveys and indexes showing general consumer attitudes have shown a lack of confidence in the present and near future. Consumers’ short-term outlook for the U.S. economy dropped to its lowest point in nearly a decade. The Conference Board’s consumer-confidence index, which hints at American attitudes toward jobs and the economy, dropped to 98.7 in June from 103.2 in May. The board’s expectations index, which measures consumers’ short-term outlook about the labor market, business, and income, tumbled to its lowest reading since March 2013. The University of Michigan’s closely followed survey of consumer sentiment, which polls consumer attitudes on personal finance, dropped to its lowest point on record.
- Future: Yields on U.S. Treasuries are rising abruptly as the Federal Reserve lifts interest rates to try to cool inflation. This could increase the federal government’s borrowing costs over time to levels higher than had been projected. Government spending on net interest costs in the fiscal year that began last October totaled about $311 billion through May, a nearly 30% increase from the same period a year earlier. Some budget analysts say an increase in the federal government’s borrowing costs could crowd out spending for other priorities and add to the overall U.S. debt held by the public. Some analysts suggest that, when the Federal Reserve cuts rates in the future, it should balance out. However, this leaves out the possibility that inflation could be persistently higher, leading to persistently higher rates.
Seeing Opportunity: Buying Products Vs. Buying Strategies
As noted earlier, a perceived opportunity can turn into a trap without the proper plan in place to tell you when you’re wrong. We have been struck by the number of investors who identify the current decline in equities as a clear buying opportunity. As you have often heard in our meetings with you, we have no strong opinion either way on what the future holds. All we know (and care about) is that trends are down, which indicates a more dangerous position, so we are positioned more defensively and we will remain on the more defensive side until trends change.
You may have understood in our last month’s note that we were preparing everyone for the prospect of our defensive posture being met by a fierce rally in equities. However, a fierce rally did not yet happen and markets instead continued to decline and met new lows in June – simply showing yet again the value of a systematic process.
As we enter July, we still want to prepare our clients. There’s a reason for the phrase “bear market rally.” It is common for a market to reach a point of reduced selling pressure when all that’s temporarily left are buyers. This can lead to a brief rally before selling pressure resumes, leading to another round of new lows. From time to time, there will be a bear market rally that seemingly pops out of nowhere. The wise choice is to still remain steadfast in the proactive risk management system of staying relatively defensive until more steady uptrends resume and hold.
As always, thank you for the opportunity to help guide you and your family toward a stress-free financial life.
David Childs, Ira Ross, and Eric Warren