Weekly Commentary, 2/27/17 to 3/3/17
The past week was reminiscent of the days following the Presidential election, as equity markets reacted positively to President Trump’s speech on Tuesday. The Dow Jones Index surged more than 300 points to close above 21,000 for the first time in history, however the new all-time highs proved difficult to hold and faded as the week wore on. The Dow and the S&P still managed to post gains of 0.88% and 0.67%, respectively. Small cap stocks continued their recent underperformance, as the Russell 2000 Index posted a slight loss shedding -0.03%.
On Friday, the Federal Reserve (Fed) Chairwoman, Janet Yellen, said the Fed is prepared to raise its benchmark interest rate later this month as long as economic data on jobs and inflation holds up. Several other Fed officials were on the record this week reinforcing the Chairwoman’s belief that the economy can withstand a hike in rates. Fed funds futures rose from a 35% probability of a hike in rates on Monday to almost 80% by Friday. With the unemployment rate at 4.8%, the employment goal has largely been met. Inflation is just below the Fed’s target and is perking up. Headline Personal Consumption Expenditures (PCE), recorded solid growth as did core (PCE). Core PCE rose 0.3% for January and 1.70% year over year, approaching the Fed’s 2% target. The Fed last raised rates in December and is expected to raise rates by another 0.75% in three 0.25% moves. As the Fed becomes less accommodative, it will be interesting to learn if they begin discussions on how to start winding down the $4.5 trillion balance the Fed has acquired since the financial crisis.
The threat of another rate hike from the Fed has taken the greatest toll on shorter-term bonds. The yield on the U.S Treasury 2 year note has risen to 1.32 % the highest level since the financial crisis while 10 year Treasury notes continue to hover around 2.50%, taking Chairwoman Yellen’s comments in stride.
Stadion uses various metrics to measure breadth in determining overall risk levels of the market. In general our market breadth measures remain positive supporting the markets strong price trends. One indicator we have mentioned recently is the performance of small cap stocks. After having led the markets higher in 2016, small cap stocks are now showing signs of weakness versus larger cap stocks. Relative performance of various styles and sectors is only one tool in our tool box. Most other indicators remain positive. We will continue to monitor changes in other breadth measures looking for deterioration and adjust allocations as warranted.
An article in the Wall Street Journal noted the difficulty in market forecasting. After only two months, the market is proving most strategist wrong. Hefty valuations and the uncertainties surrounding Donald Trump as President led to a collective forecast of a 5% gain for the S&P 500, the lowest expected gain since 2005. It took two months to blow through that forecast sending prognosticators back to their models and spreadsheets to update their predictions for the remainder of the year. At Stadion, we realize the futility of forecasting and attempt to provide strategies that will provide reasonable returns over a full market cycles without projecting our opinions or biases in the investment decision making process.
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 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. By our definitions, the strategy is roughly 70% correlated to U.S. equities. There were no changes in the strategy over the week.
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 satellite and core portions of the portfolio are fully invested. There were no changes in the strategy’s holdings.
Stadion Managed Risk 100 Strategy: 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 shorter tem risk measures continued their recent improvement. The portfolio is fully invested. There were no changes in the strategy’s holdings.
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 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. 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 decision.
Past Performance is no guarantee of future results. Investments are subject to risk, and any of Stadion's investment strategies may lose money.