Weekly Commentary, 03/20/17 to 3/24/17
Negative news originating in our nation’s capital put increased pressure on equity prices this week. Republican leaders pulled President Trump’s plan to repeal and replace Obamacare because Mr. Trump could not gather enough support from Republicans or Democrats to ensure the plan’s passage.
Our current 12% rally in equity prices since the election was predicated on President Trump’s promises to stimulate economic growth through tax cuts, deregulation and infrastructure spending. The inability to successfully pass the Republican’s first order of new business brings into doubt the President’s ability to implement his other campaign promises. Equity prices responded accordingly as the S&P 500 fell -1.44%, its biggest loss since the week before the election. The Dow Jones Industrial Index dropped -1.52% and the Russell 2000 Index shed -2.64% as smaller cap stocks continued their underperformance. The KBW NASDAQ Bank Index slumped -4.72%, while the yield on the benchmark 10 year U.S Treasury Note fell to 2.40% from 2.50%.
The S&P 500’s -1.2% decline on March 21 ended a streak of 109 trading days without seeing a decline of 1% or more in the index. To put that in perspective, that is the 9th longest streak in history, with the most recent being 1995. Other previous record streaks ended in 1985 and the majority took place in the 1950’s and 1960’s.
The market’s internal deterioration that began in early March continued as the President’s healthcare bill dragged through the House. Stadion uses various tools to measure the market’s short and long term trend direction. The weakness was enough for some of the shorter term risk measures to turn negative resulting in risk reduction in several Stadion strategies. The shorter term trend remains up but is losing momentum. The longer term up trend remains in place.
The fundamental reasons for the market’s recent weakness could be attributed to political maneuverings, the Federal Reserve (Fed) raising rates, falling oil prices or even equity valuations. At Stadion, we don’t endeavor to predict market fundamentals but follow our disciplined investment process, attempting to balance upside performance in what could be a period of rising risks.
Stadion Tactical Growth Strategy: As a dynamic asset allocation strategy, the Stadion Tactical Growth Strategy follows an investment framework that analyzes the Sharpe ratio of over 1500 Exchange Traded Funds (ETFs) over multiple time periods each day. Given the simplicity of the Sharpe ratio, we believe we get a unique lens into market activity by seeing the interaction of return and risk. The proprietary ranking system will generally narrow our focus to those ETFs that track well known asset classes, indexes, and markets. We believe this disciplined process will guide us toward the best asset allocation, which means at times, we won’t use bonds for diversification or our equity asset class allocation won’t resemble the traditional capitalization structure. There were no changes to the strategy for the week. By our definitions, the strategy is roughly 73% correlated to U.S. equities.
Stadion Tactical Defensive Strategy: The Stadion Tactical Defensive Strategy uses a weight of the evidence model combining two trend-following elements to determine risk levels in the market. One element focuses on longer term cyclical trends (the core) and the other seeks to balance safety and return among shorter to intermediate trends (the satellite). The shorter term weight of the evidence model continued its deterioration resulting in some risk reduction in the satellite portion of the portfolio. The shorter term trend remains up but is losing momentum as measured by our models. The longer term up trend remains in place and the core portion of the portfolio is fully invested.
Stadion Managed Risk 100 Strategy: The Stadion Managed Risk 100 Strategy, Stadion’s most conservative tactical strategy, uses a weight of the evidence model which focuses on shorter term trends to determine risk levels in the market and the most appropriate asset allocation. The model continued its deterioration, resulting in some risk reduction in the satellite portion of the strategy. The shorter term trend remains up but is losing momentum as measured by our models.
Past performance is no guarantee of future results. Investments are subject to risk, and any of Stadion’s investment strategies may lose money. The investment strategies presented are not appropriate for every investor and financial advisors should review the terms and conditions and risks involved. Stadion’s actively managed portfolios may underperform during bull markets. Some information contained herein was prepared by or obtained from sources that Stadion believes to be reliable. There is no assurance that any of the target prices or other forward-looking statements mentioned will be attained. Any market prices are only indications of market values and are subject to change. The Russell 2000 Index is a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index. It is the most widely quoted measure of the overall performance of the small-cap to mid-cap company shares. The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. The S&P 500 Index is the Standard & Poor’s Composite Index of 500 stocks and is a widely recognized, unmanaged index of common stock price. The KBW NASDAQ Bank Index is a modified market capitalization weighted index designed to track the performance of leading banks and thrifts that are publicly traded in the U.S. The Index includes banking stocks representing large U.S. national money centers, regional banks and thrift institutions.It is not possible to invest directly in indexes (like the S&P 500) which are unmanaged and do not incur fees and charges. The U.S. 10-Year Treasury Note is a debt obligation issued by the United States government that matures in 10 years. The Sharpe ratio measures the excess return per unit of deviation, or risk. The core personal consumption expenditures index measures the prices paid by consumers for goods and services without the volatility caused by movements in food and energy prices. Any references to specific securities or market indexes are for informational purposes only. They are not intended as specific investment advice and should not be relied on for making investment decisions.
Past Performance is no guarantee of future results. Investments are subject to risk, and any of Stadion's investment strategies may lose money.