So far, June has been more positive than we had expected. Even with the increased volatility earlier this week, the S&P 5001 is still generally positive, and by our measure, still trending upwards (FastTrack data). While news headlines have been pointing towards “trade wars” between the US and many other countries, we’ve not seen a truly negative effect in the markets for more than a day of uncertainty. For now, the market is treating these news events as an after-thought to a 24 hour news cycle.
Where we believe more attention should be placed is on the Federal Reserve’s increasing of interest rates – and projecting more increases in the future. If short term rates move up too quickly, it could likely result in an inverted yield curve. Why is that important to note? Because this is often an early indication of a coming recessionary cycle. We feel this is overdue, as we’ve mentioned in previously newsletters.
Earlier this month, our core equity model replaced International Large Cap Growth with a Mid-Cap index. As we mentioned last month, the Small/Mid Cap stock segment of the market has been stronger than we’ve seen in a while, so we’re happy to add that in a small portion of our portfolios (StockCharts.com data). But our core still remains focused on larger company funds with an emphasis on domestic Large Cap Growth and Technology. That’s where we believe the strength has been. We also think it might be time for a shift to more defensive areas soon, but as long as we perceive the trend to be holding, Large Cap Growth is where we will remain. (See chart below.)
Six-month comparison of the S&P Growth and Value Indexes (iShares ETFs) – StockCharts.com
Our V32 Indicator continues to be in “Protection” mode for the remainder of the second quarter of 2018. However, if the domestic markets hold up through the end of the week, we could see our indicator shift back towards stocks over bonds.
Bonds – Even though we’ve had a brief reprieve from the bond market’s downward movement, we continue to keep durations short. Theoretically, that keeps the risk and volatility of holding bonds lower due to the limited interest rate sensitivity of shorter duration bonds. The Aggregate Bond index (AGG) is still negative for the year. And if the Federal Reserve continues to raise interest rates, that doesn’t bode well for traditional types of bond holdings in the near-term.
However, what the interest rate increases have improved are the rates paid out by Money Market funds (and even some high yield savings accounts). For the first time in many years, we can hold a Money Market fund as a viable asset class with a reasonable interest rate. For us, that can mean more choice when it comes to finding less volatile places to wait out eventual choppiness.
Since It is a great time of year to rest and recharge, I’ll leave you with a quote from my “summer reading” book pick, The One Thing by Gary Keller:
“Take time off. Block out long weekends and long vacations, then take them. You’ll be more rested, more relaxed, and more productive afterward. Everything needs rest to function better, and you’re no different. Resting is as important as working.”
Happy resting!
1 The Standard and Poor’s 500 is an unmanaged, capitalization-weighted benchmark that tracks broad-based changes in the U.S. stock market. This index of 500 common stocks is comprised of 400 industrial, 20 transportation, 40 utility, and 40 financial companies representing major U.S. industry sectors. The index is calculated on a total return basis with dividends reinvested and is not available for direct investment.
2 V3 is a proprietary indicator developed by Shadowridge Asset Management, LLC. Its objective is to take several market sentiment factors and project how to view US stock market investment in the following quarter: for Safety, for Balance, or for Growth.