Weekly Commentary, 2/13/17 to 2/17/17
U.S. stocks extended their winning streak with major equity indexes posting weekly advances of at least 1.50% and nearing gains of 5% for the year. The song remains the same as signs of economic growth and improving corporate earnings are fueling the markets higher.
Federal Reserve (Fed) Chairwoman, Janet Yellen, stated recently in testimony on Capitol Hill that “the committee will evaluate whether employment and inflation are continuing to evolve in line with these expectations, in which case a further adjustment of the federal funds rate would likely be appropriate.” The Chairwoman later commented that “I can’t tell you exactly which meeting it would be.” According to Bloomberg, the probability of a March rate hike has doubled in the past weeks to 44%. Economic releases also support the argument for a hike in interest rates. The consumer price index (CPI) jumped 0.60% in January — twice the expected increase, putting the year-on-year increase up to 2.5% – the highest in five years. The Fed’s preferred measure of inflation is the personal consumption index (PCI) which is running below the Fed’s target of 2% but has been trending up. The unemployment rate is currently at 4.8%, a level that many Fed officials consider full employment, which is one of their mandates supporting higher rates. Uncertainty over the prospects for major changes in tax reform and infrastructure spending has complicated matters for Fed members as they ponder the need to nudge rates higher.
In the face of potentially higher rates, the bond market is proving quite resilient. The yield on the benchmark 10-year U.S. Treasury note rose initially following the Chairwoman’s hawkish comments but couldn’t hold above 2.50% and settled the week at 2.42%.
The narrative remains the same from a technical standpoint as well. Price and breadth technical measures continue to confirm the recent price movement. Investor expectations are quite high and anxiety remains subdued. The S&P 500 has now gone 89 days without a 1% decline while volatility as measured by the VIX finished the week at 11.49, hovering near all-time lows.
Washington expectations are still the largest risk currently facing the market. Investors may gain insight into President Trump’s plans during an address to Congress on February 28th where he is expected to outline his fiscal plans. In the meantime, we will continue to participate in the market’s optimism while attempting to balance upside potential and downside 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 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: 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 shorter term 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. The VIX is the Chicago Board Options Exchange Market Volatility Index, a popular measure of the implied volatility of S&P 500 index options. Often referred to as the fear index or the fear gauge, it represents one measure of the market's expectation of stock market volatility over the next 30 day period. IIt 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.