Weekly Commentary, 2/20/17 to 2/24/17
U.S. stocks extended their march higher bolstered by positive earnings announcements and comments from Treasury Secretary Steven Mnuchin regarding tax reform. According to Mnuchin, a tax reform package that includes tax cuts and the repatriation of cash held overseas could be passed by Congress before the August recess. The Dow Jones Index and the S&P 500 Index responded accordingly, both hitting new record highs. The Dow gained 0.96% for the week and the S&P 500 added 0.69%. Meanwhile, the NASDAQ Composite posted a smaller gain of 0.12% while the Russell 2000 Index slipped 0.38%.
The minutes from the Federal Open Market Committee (FOMC) meeting on February 1 indicated the committee could take a more aggressive course of action and raise rates as early as the March meeting. Policy makers said they could raise rates “fairly soon” if the economy stays on track. The FOMC did acknowledge that uncertain fiscal policies can make forecasting challenging.
Equity markets are focusing on the pro-growth prospects of the Trump presidency. The S&P 500 currently trades at 18 times forward earnings, a level many consider elevated. The Investors Intelligence poll of advisors found 61.2% bullish, slightly lower than the high-water mark achieved a few weeks earlier which was the highest since December 2004.
Bond markets around the world are sending a different signal than the equity market optimism. Yields on the benchmark U.S. Treasury 10-year note finished the week yielding 2.32%, the lowest since last November. U.S. yields are trending lower in spite of threatened increased government spending and a Federal Reserve which is tightening monetary policy. Globally, German 2-year yields are now yielding -0.95%, close to a record low, amid worries over the upcoming French elections.
The growth and earnings backdrop remains supportive, however beneath the price action there were some interesting developments over the week. The defensive sectors of the market were the outperformers. Utilities surged almost 3% followed by gains in healthcare and consumer staples. Underperformers included energy, industrials and cyclicals. We will continue to watch for further signs of divergence between price trends and market breadth, while attempting to balance risk and reward as President Trump’s promises continue to unfold.
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. 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 NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market and it is highly followed in the U.S. as an indicator of the performance of stocks of technology companies and growth companies. 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. 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.