Trend Following’s Response To Delayed Rate Cuts

“Never mistake a clear view for a short distance.”

–Paul Saffo

We believe a significant advantage of trend following is its ability to help manage emotions and behaviors by providing a clear, adaptable plan for any market scenario. 

This systematic investing strategy aims to maintain discipline and consistency in the face of market fluctuations. In our view, trend following excels at discerning what to do with market outliers — those rare, unpredictable events that can significantly impact performance. For example, NVIDA’s market cap has reached $2.6 trillion, $890 billion higher than all the companies in the S&P 500 Energy sector combined. Such unprecedented events underscore the need for a robust plan for navigating these exceptional occurrences.

Last month we discussed the tendency of markets to experience downturns and how trend following often takes a wait-and-see approach during small declines. Case in point, while April’s U.S. equity market declines were retraced in May, we understand that did not have to be the case and very well could have continued declining.  We were simultaneously ready to decrease, increase, or hold exposure levels depending on how the trends presented themselves. This illustrates that trend following is less about predicting outcomes and more about maintaining a disciplined process. This investing approach enables decisive action without second-guessing, which we think is a significant advantage.

In this month’s Note, we discuss our continued wait-and-see approach to fixed income, which has been significantly affected by what’s been happening — or not happening — with interest rates. Despite predictions of cuts in 2024, higher rates have persisted. At Spartan, we have navigated this uncertainty by adhering to our rules, which has allowed us to benefit from the high yields of short-duration instruments.

But first, here’s a summary of our take on what transpired in the markets heading into June.

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 static your risk profile calls for. Adjustments can vary across strategies depending on each strategy’s objectives. What’s illustrated above most clearly reflects allocation adjustments for the Growth Strategy. 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.


Equities & Real Estate

After breaking a run of five straight positive months by declining in April, the S&P 500 Index resumed its run by increasing through May, making new all-time highs in the process. While all segments again performed well, growth and tech remained the leaders. For the second consecutive year, the benchmark index will approach its halfway point with a double-digit return. As a result, our portfolios will remain overweight in U.S. equities. 

While still weaker over the long term compared to U.S. equities, foreign markets, including emerging markets, have managed to hold their own during the short term. Uptrends across all timeframes remain in place. Consequently, this segment will be at its baseline allocation as we move into June. 

After looking like it could trigger an intermediate-term uptrend, real estate securities finished the month relatively poorly, causing downtrends to remain intact. Thus, allocations to this asset will remain at or near its minimum as we transition from May to June. This exposure will continue to be held within the much stronger U.S. equity asset class.

Fixed Income

The same economic reports that have largely contributed to the recent down volatility in real estate have also affected fixed-income assets. In April, fixed income followed U.S. equities into the red, pushing further into negative territory for 2024 year-to-date. The intermediate-term uptrends that were clinging to a positive position entering the month have joined their long-term counterparts in a downward direction. Therefore, allocations will return to their minimum, with the exposure being moved to ultra-short-term Treasuries. Spartan portfolios will remain overweight on the very short end of duration and completely out of longer-duration instruments.   

Three potential catalysts for trend changes:

  • Chinese Economics: The new tariffs announced by President Joe Biden on roughly $18 billion worth of Chinese goods will not be economically significant relative to the GDP of China. However, the symbolism implied by the moves reinforces a shift in policy. Adding to tariffs imposed by former President Donald Trump signals that the decoupling of the Chinese and U.S. economies is becoming irreversible. Western countries have been trying to break China’s hold on raw materials essential for defense and green technologies. Those efforts have not produced many results: Chinese companies are becoming more dominant, not less. They are expanding operations, increasing supply, and decreasing the prices of metals like lithium, cobalt, and nickel. American and European challengers cannot compete.

  • Children are Expensive in America: New data about parents living with children under the age of 18 shows a decline in financial confidence. About 64% of parents said they were doing all right financially in 2023, down from 69% in 2022. Sentiment among that group has plunged since 2021 and is worse than Americans in general. About three-quarters of all respondents, both parents and non-parents said they were doing all right, down slightly from a year earlier. Perhaps the most jarring finding is that some households with young children reported paying nearly as much on child care as housing.

  • World Needs More Children: The world is at a demographic milestone: The global fertility rate likely will soon drop below the point needed to keep the global population constant or increasing. The birthrate decline is across the board: in almost every region of the world,  and across all levels of income, education, and labor-force participation. The decline has big implications for the way people live, how economies grow, and where the world’s superpowers stand. Since the pandemic, labor shortages have become widespread throughout developed countries. This could continue in the coming years due to the fall in birth rates, resulting in an ever-decreasing flow of young workers. 

    Sourcing for this section: The Wall Street Journal, “The U.S. Finally Has a Strategy to Compete With China. Will It Work?” 5/20/2024; The Wall Street Journal, “China Is Winning the Minerals War,” 5/21/2024; The Wall Street Journal, “Parents Are Feeling the Pain of Inflation and Child-Care Costs,” 5/21/2024; and The Wall Street Journal, “Suddenly There Aren’t Enough Babies. The Whole World Is Alarmed.” 5/13/2024

Rate Cuts: Still Waiting, Waiting, Waiting

“If you fail to plan, you are planning to fail.”

– Benjamin Franklin

We’ve reached a point of astonishment that more investors don’t rely exclusively on trend-following techniques. In our minds, the benefits are so evident we occasionally find it surprising when someone needs extensive convincing.

To clarify, we love skepticism and thoughtful questioning. They give us a chance to provide the same “AHA!” moment we experienced when embracing trend-following for the first time.  As an example, we have received plenty of questions (and some skepticism) about our positioning during Q2, providing an excellent example of the merits of a systematic risk management system. 

In last month’s Note, we highlighted how markets tend to fall, as seen in April, and how the discipline of trend following allows investors to calmly stay the course — even when this can be emotionally difficult. For us, it’s not about deciding what to do, it’s about committing to following the process and responding as it dictates. We don’t have to think about what to do in any given timeframe, we just need to act on the trends presented within the rules we have set. Sometimes this means we don’t make any changes, as was the case heading into this month.

Equities have illustrated the benefits of trend following during the last couple of months, but the principles can be applied across all asset classes and positions, and for this month fixed-income is a great example.

Few things are more impactful on fixed-income positions than the path and ultimate destination of interest rates. At the end of 2023 and the beginning of 2024, investor sentiment had made a powerful shift from bullish on rates (bearish on bond prices) to the inverse: bearish on rates (bullish on bond prices). As we near the midway point of 2024, we see the consensus was once again incorrect. The expectation of multiple cuts by this point has been unfulfilled and fixed-income or real estate investors betting on a drop in rates have not been rewarded.

For us, as trend followers, this delay in rate cuts has not impacted our approach to allocating and stewarding your financial lives. We have simply stuck to our rules, which have generally kept us allocated to ultra-short-duration instruments to take advantage of their relative strength and higher yields. 

We will continue to rely on our systematic risk management approach to help us navigate ever-changing market environments and scenarios and it is our hope that this trend-following approach will continue to give you confidence that whatever the case may be in any given time frame, we have a plan to respond and steward your financial lives.


The Spartan Team

Disclaimer: this note is for general update purposes related to the 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 particular 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. This email and the data herein is not a solicitation to invest in any investment product nor is it intended to provide investment advice. It is intended for information purposes only and should be used by investment professionals and investors who are knowledgeable of the risks involved. No representation is made that any investment will or is likely to achieve results comparable to those shown or will make any profit at all or will be able to avoid incurring substantial losses. While every effort has been made to provide data from sources considered to be reliable, no guarantee of accuracy is given. Historical data are presented for informational purposes only. Investment programs described herein contain significant risks. A secondary market may not exist or develop for some investments portrayed. Past performance is not indicative of future performance. Investment decisions should be made based on the investors specific financial needs and objectives, goals, time horizon, tax liability, risk tolerance and other relevant factors. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Investors should consider the underlying funds’ investment objectives, risks, charges and expenses carefully before investing. The Advisor’s ADV, which contains this and other important information, should be read carefully before investing. ETFs trade like stocks and may trade for less than their net asset value. Spartan Planning Group, LLC (“Spartan” or the “Advisor”) is registered as an investment adviser with the United States Securities and Exchange Commission (SEC). Registration does not constitute an endorsement of the firm by the SEC nor does it indicate that the Adviser has attained a particular level of skill or ability. Indexes are unmanaged and do not incur management fees, costs, and expenses. Spartan’s risk-management process includes an effort to monitor and manage risk, but should not be confused with and does not imply low risk or the ability to control risk. There are risks associated with any investment approach, and Spartan strategies have their own set of risks to be aware of. First, there are the risks associated with the long-term strategic holdings for each of the strategies. The more aggressive the Spartan strategy selected, the more likely the strategy will contain larger weights in riskier asset classes, such as equities. Second, there are distinct risks associated with Spartan Strategies’ shorter-term tactical allocations, which can result in more concentration towards a certain asset class or classes. This introduces the risk that Spartan could be on the wrong side of a tactical overweight, thus resulting in a drag on overall performance or loss of principal. International investments may involve additional risks, which could include differences in financial accounting standards, currency fluctuations, political instability, foreign taxes and regulations, and the potential for illiquid markets. Investing in emerging markets may accentuate these risks. Diversification strategies do not ensure a profit and do not protect against losses in declining markets