Dear Spartan Client,
“Adaptability is being able to adjust to any situation at any given time.”
Global markets continued to decline in February, as the downside volatility that began in early January continued to permeate nearly all major asset classes. From its high on January 4 to the low on February 24, the S&P 500 declined 14.4%, its largest drawdown since the Coronacrash in March 2020.
In our conversations with other advisors, one refrain stands out: “In February, there was nowhere to hide!” Whether considering stocks; real estate; crypto; or bonds of all durations, credit quality, and type, February was somewhat unique in that context. In fact, government bond prices, typically thought of as a “safe haven” when stocks decline, fell as 10-year rates rose nearly 14 basis points during the month.
Given the recent news around Russia, inflation, and rising rates, how does one go about designing a strategy to be specifically tailored to account for these economic and geopolitical risks? In our view, you don’t. Each and every environment is unique, with the speed, context, and timing being different for each. Our approach to designing systematic investing strategies is based on the one variable that is relevant in all market environments and for all asset classes: the price of the asset/market.
In this month’s note, we discuss the necessary trade-offs required to remain adaptable in all market environments. We discuss the idea that by acknowledging that the future is unknowable, one can still design a set of rules to deliver a repeatable and consistent process for making high-quality asset allocation decisions.
Below are the asset classes utilized in our portfolios and their model-driven exposure heading into March.
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 March, 2022
U.S. Equities: Exposure will not change, as the intermediate-term trend remains negative and the long-term trend positive.
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 the intermediate-term trend remains negative and the long-term trend positive.
U.S. and International Treasuries: Exposure will not change and is at its minimum 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 decrease slightly, as exposure is handed back to gold, which has regained uptrends across both timeframes.
Alternatives: Exposure will increase, as gold crosses into a long-term uptrend.
Three potential macro catalysts for the recent trend changes:
- Invasion: Russia’s invasion of Ukraine heaped additional risks on a global economy already struggling with inflation, supply-chain congestion, and a rocky recovery from the pandemic. The economic impact of the invasion will depend on the scale of the fighting and the effectiveness of the new sanctions the U.S. and its allies have enacted.
- Oil Shock: A global oil benchmark surged above $100 a barrel for the first time since 2014. While Ukraine isn’t a big oil producer, Russia is one of the world’s largest and most influential crude-market players. Russia is also the single largest exporter of natural gas, and the country’s military push poses another threat to Europe’s already tenuous supply.
- Consumer Confidence: Unlike the U.S.’s last big inflation bout in the 1970s and early 1980s, when price pressure built over a decade, this time a cost-of-living runup unfolded in months. It caught many by surprise, from President Joe Biden and Federal Reserve Chairman Jerome Powell to the ordinary grocery shopper. Polling shows the latest phase of the pandemic has further eroded faith in leaders and institutions, leading to feelings of frustration, aimlessness, and helplessness, even among some who are doing well in today’s economy.
Repeat After Me: The Future is Unknowable
What’s paramount at Spartan is having proper context of the markets and taking a long-term approach that matches the investment/retirement time horizon of our clients. We often repeat the mantra that nothing in life or investing is free. As a result, there is a constant struggle between risk, returns, investor behavior, and other factors (like taxes). Prioritizing one or two of these always means risking demoting the others. Our goal is to constantly pursue the optimal tangent point among those variables.
Obtaining this level of perspective requires taking a few steps back and having strategies that eschew hourly, daily, or sometimes even weekly market moves in favor of a broader focus. We often refer to this as “having strategies that fit the market NOT like a glove, but rather like a mitten.” For those who have children, you likely agree that it’s much easier to put mittens, rather than a glove, on a 4-year-old.
This mitten versus glove comparison and how it plays out in the markets is clear now. After very few tactical shifts since the COVID-induced panic of Q1’20, our portfolios have recently undergone their first significant defensive shift in almost two years. Though material, the shifts taken so far have been by no means drastic. To some, they may even seem overly measured and deliberate. But, this too is by design.
During an environment that appears risky – like a pandemic, rapid inflation, or the threat of war when global equity prices are rapidly declining – it is easy to assume that one should be more defensive. However, just as quickly as things went from rosy a few months ago to correction territory, the opposite can occur and markets can rapidly make new highs. If that occurs, then the inverse emotion rapidly sets in, and fear transforms to FOMO.
The solution, in our view, is that we must constantly remind ourselves that no one can know exactly what will happen next.
All we know for certain is that right now, in this moment, markets have weakened to or below their longer-term averages. At Spartan, we have reacted the same way we always do, by following our time-tested systematic investing rules and reducing risk commensurate with what has happened (not what might happen). In hindsight, the picture is ALWAYS clear. Yet that clarity NEVER does anything to improve predictive abilities.
In our opinion, the beauty of a trend-based approach is its simplicity, consistency, and repeatability. Even if one believes that some declines are predictable, one must concede that not ALL are. All it takes is one significant mistake to interrupt compounding. However, all declines (and all increases) have a common characteristic: price trends. If one focuses on price and acts consistently, then the results will be vastly more reliable than varying approaches in varying situations.
The perfect pair of gloves feels better than mittens, but markets are neither perfect nor uniform, and an investor’s ability to navigate through them is far less than perfect. If one can attain the humility to realize they know they don’t know what will happen, then a simple yet sophisticated process implemented by a well-intentioned and well-prepared advisor is a dynamic combination to achieve investor goals.
David Childs, Ira Ross, and Eric Warren
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