CST 50 - May 2022 Portfolio Review

Asset Allocation

After a difficult April, both equities and fixed income experienced a tepid rebound in May as the market continued to digest concerns over recession risk, sticky inflation and rising interest rates. Our portfolios were equal weight equities, underweight fixed income and overweight commodities. Commodities performed well and helped generate a net positive asset allocation effect for portfolios.

Security Selection

In equities, exposure to the US factor rotation strategy (FCTR) and the European financials value theme (EUFN) contributed to outperformance against the global equity benchmark. In Fixed Income, our active tilt towards short maturity bonds and a satellite allocation to senior floating rate loans contributed to underperformance against the longer maturity fixed income benchmark.

Detractors from Performance

Contributors to Performance

  • Short Maturity Bonds

  • Senior Floating Rate Loans

  • S&P 500

  • European Financials

  • US Factor Rotation

  • Commodities

Underweight

Overweight

  • Technology Sector

  • Asia Pacific Equities

  • Government Debt

  • Western Europe

  • Financial Sector

  • Short Term Corporate Debt

Strategic Allocation Rationale

Asset Allocation:

We view Equities and Alternative Strategies as strategically attractive relative to Fixed Income. With high inflation and a tightening Federal Reserve, we believe interest rates have further room to rise - which will weigh on income. Equities and commodities provide an effective hedge against inflation and geo-political uncertainty. We do not an anticipate a recession.

Equities:

We do not anticipate a recession, corporate profitability remains strong and the consumer's balance sheet is healthy. In the near-term we are opportunistic and in the medium-term we are bullish. In the near-term we are opportunistic and in the medium-term we are bullish. We are geographically diversified and are selective with our US exposures, favoring value over growth stocks.

Fixed Income:

After a historic rise year to date, we are bearish on interest rates in the near-term, while in the medium term we see the potential for a further rise. We continue to favor shorter maturities. We also favor high yield and emerging market debt due to very attractive yields. We are opportunistically adding to 2-to-4 year corporate bonds.

Alternatives:

With high inflation, rising rates and elevated geo-political uncertainty, we remain overweight commodities. We favor energy and agriculture. After an exceptional start to the year, we are prepared to react to inflection points in the asset class and will take profits when appropriate.

Portfolio Changes Since Last Month

Decreased

Increased

  • Cash Allocation

  • Senior Floating Rate Loans

  • Value & Quality Tilted US Equities

  • Held-to-Maturity 2026 Investment Grade Bonds

  • Held-to-Maturity 2023 High Yield Bonds

Disclosures: This information was produced by and the opinions expressed are those of Accuvest as of the date of writing and are subject to change. Any research is based on Accuvest proprietary research and analysis of global markets and investing. The information and/or analysis presented have been compiled or arrived at from sources believed to be reliable, however Accuvest does not make any representation as their accuracy or completeness and does not accept liability for any loss arising from the use hereof.  Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated therein.   Any sectors or allocations referenced may or may not be represented in portfolios of clients of Accuvest, and do not represent all of the securities purchased, sold or recommended for client accounts.

The reader should not assume that any investments in sectors and markets identified or described were or will be profitable. Investing entails risks, including possible loss of principal. The use of tools cannot guarantee performance. The charts depicted within this presentation are for illustrative purposes only and are not indicative of future performance. Past performance is no guarantee of future results. Actual results may vary based on an investor’s investment objectives and portfolio holdings. Investors may need to seek guidance from their legal and/or tax advisor before investing. The information provided may contain projections or other forward-looking statements regarding future events, targets or expectations, and is only current as of the date indicated. There is no assurance that such events or targets will be achieved and may be significantly different than that shown here. The information presented, including statements concerning financial market trends, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons.

Market Update - Summer 2022

It has been a tough year for balanced portfolios.

Equities and bonds have suffered from an increasingly aggressive monetary policy pivot from “low and loose” to “high and tight”.  This hawkish pivot by global central banks has come in response to high and persistent inflationary pressures in the post-pandemic recovery.

Since the start of the year, the yield on the 10-year Treasury has doubled, from 1.5% to 3.0%.  Bond prices have struggled to hold value in the face of aggressive rate hikes and rampant inflation. Furthermore, the war in Ukraine and China’s zero-COVID policies have added to inflationary pressures and triggered economic growth concerns.

As of this writing, the US aggregate bond index is down -10% YTD and the S&P 500 is down -14% YTD.

Methods for the Madness: Diversifying Portfolios when Correlations are High

What we have seen this year is a relatively rare occurrence.  Stocks and bonds typically have different risks.  As a result, owning a mix of stocks and bonds generally helps protect portfolio values against large downturns.  Unfortunately, both stocks and bonds have meaningfully decreased in value this year.  In portfolio-geek language, the correlation between stocks and bonds has been high.  In today’s environment, the traditional diversification that helps protect portfolios has remained elusive.

 So, what can investors do to reduce the risks of high correlations?

 The first step is to ensure diversification within asset-classes. In equities, it means owning stocks across sectors, regions, and styles. In fixed income, it means owning bonds across varying maturities, credit quality, and market segments.

 The second step is to consider allocating to real assets in portfolios. At Accuvest Global Advisors, we hold a basket of diversified commodities for most client portfolios. We believe commodities offer attractive value and cost-efficient protection against inflation.  Importantly, commodity prices are subject to risks that are different from the economic growth and interest rate risks behind stock and bond prices.  Commodities are a key source of diversification in a market environment where high inflationary pressures are weighing on both economic growth and interest rates simultaneously.

The chart below shows rolling correlations over the past 5 years between the S&P 500 and the US corporate bond index, and between the S&P 500 and the GSCI commodities index. When correlations are high, the assets are moving in the same direction.  When correlations are low, the assets are moving in opposite directions.  Assets with lower correlations provide those diversification benefits we discussed earlier.  Looking at the data, we see that bonds have tended to exhibit negative correlations with stocks, while commodities have exhibited positive correlations. However, as we have entered 2022 these relationships have been turned on their heads. Bond correlations have turned positive while commodities correlations have turned negative.  

An allocation to commodities provides welcome diversification to balanced portfolios. Although it does not guarantee against loss, diversification is one of the most important tools for reaching long-term financial goals and insuring against ruinous outcomes. 

Commodities as an effective inflation hedge

Commodities give portfolios the opportunity to produce returns that are not reliant on economic/earnings growth (equities) or interest rates (bonds). Accordingly, commodities bring a third source of returns to portfolios by offering competitive real return potential if inflation stays high and persistent.

Since the 1980s, inflation has remained low and well-anchored. As a result, traditional balanced portfolios outperformed commodities, with tailwinds from falling inflation risk premia and the search for yield. But as we are seeing in 2022, balanced stock-bond portfolios can struggle when high inflation pushes interest rates higher and real economic growth lower.

Equities provide a claim on nominal growth and can be an inflation hedge if companies have pricing power and/or stable input costs. But as we have seen, inflation has triggered central bank tightening and it is weighing on equities, especially leveraged or expensive stocks. Similarly, inflation has eroded real returns in fixed income and rising yields have caused bond prices to plummet. In contrast, commodities appear inexpensive given their supply and demand imbalance and intrinsic exposure to inflation. These characteristics provide effective portfolio protection.

We believe traditional portfolios remain under-invested in commodities and real assets.  We view this alternative asset class a vital risk diversifier for clients.  More so, barring a synchronous and significant negative global demand shock, we believe commodities have the potential to continue outperforming the traditional asset classes.

Investor optimism has faced increasing pressure during Q1 of 2022.  Advisors and asset allocators are tasked with navigating high inflation, slowing economic growth, rising interest rates, and most recently, an escalating geo-political conflict.  As the fog of war creeps in, we recommend a disciplined data-driven approach to asset allocation and portfolio construction.  

We believe the key question facing investors today is: Are we entering a prolonged period of economic contraction and negative earnings growth? If the answer is yes, then downside risk remains for equity and commodity prices (and fixed income, now offering higher yields, would screen as attractive).  If the answer is no, and the global economy does not enter a recession, then there are investment and rotation opportunities to capture.

The preponderance of our data suggests that the recent market sell-off has “priced-in” more than just uncertainty and indigestion surrounding the acceleration of monetary policy tightening (more rate hikes sooner).  We believe escalation and extrapolation of risks surrounding Russia has forced the market to begin “pricing-in” an oncoming recession.  Our indicators continue to suggest low unemployment, high corporate investment, and resilient household consumption.  We expect a peak in inflation and no economic recession during the next 12 months. 

If our assessment of the economy and inflation proves accurate, and the FED stays flexible and “data dependent” with rate hikes, then many investors have over-priced the fundamental risks facing markets today.  As an example, bearishness, as surveyed by the American Association of Individual Investors, has averaged 47% over the last 4 weeks (as of March 17th).  This level of bearishness is rare, standing 17% above average and experienced only 4% of weeks since 1988.

Understandably, transitioning from loose monetary policy to tight monetary policy is never “comfortable” for investors.  However, history shows us that the 24 months after the beginning of a rate hiking cycle are rewarding for investors (using data since 1970).  Rate hiking cycles begin when the economy is strong enough to generate inflation (demand outpaces supply) and unemployment is low.  This is the state of the economy today, and we expect corporations and consumers to show resilience once again to the ratcheting up of interest rates and the cost of credit. 

We continue to see evidence for maintaining economic optimism and underweighting fixed income in portfolios.  Interest rates are normalizing for good reasons – high inflation, robust economic growth, and still low real yields.  Within fixed income portfolios, we prefer short duration credit (floating rate loans where possible) and inflation protected treasuries. 

We allocate the proceeds from being underweight fixed income to commodities.  Commodities offer effective and efficient inflation protection for portfolios while also hedging prevalent geo-political risks.  Within commodities energy is a key exposure that looks more attractive near-term than medium-term.  We complement energy with allocations to metals (base and precious) and agriculture – both of which exhibit more impressive medium-term supply and demand imbalances than oil. 

In equities, we see less risk in US value and quality factors.  As investor confidence returns, and geo-political uncertainty abates, we expect to increase portfolio exposure to undervalued international equities more leveraged to economic growth and higher interest rates (cyclicals, financials, and commodity exporters).  

Opportunities and upside remain in the equity and commodity asset classes, but the texture of returns and leadership within those asset classes is expected to differ from the last 10 years.  Please let do not hesitate to contact marketing@accuvest.com if you would like to explore and discuss our real-time asset class preferences, portfolio positioning, or economic outlook.

Disclosures: This information was produced by and the opinions expressed are those of Accuvest as of the date of writing and are subject to change. Any research is based on Accuvest proprietary research and analysis of global markets and investing. The information and/or analysis presented have been compiled or arrived at from sources believed to be reliable, however Accuvest does not make any representation as their accuracy or completeness and does not accept liability for any loss arising from the use hereof.  Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated therein.   Any sectors or allocations referenced may or may not be represented in portfolios of clients of Accuvest, and do not represent all of the securities purchased, sold or recommended for client accounts.

The reader should not assume that any investments in sectors and markets identified or described were or will be profitable. Investing entails risks, including possible loss of principal. The use of tools cannot guarantee performance. The charts depicted within this presentation are for illustrative purposes only and are not indicative of future performance. Past performance is no guarantee of future results. Actual results may vary based on an investor’s investment objectives and portfolio holdings. Investors may need to seek guidance from their legal and/or tax advisor before investing. The information provided may contain projections or other forward-looking statements regarding future events, targets or expectations, and is only current as of the date indicated. There is no assurance that such events or targets will be achieved and may be significantly different than that shown here. The information presented, including statements concerning financial market trends, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons.

CST 50 - April 2022 Portfolio Review

Asset Allocation

Both equities and fixed income suffered a difficult month as concern over recession risk, sticky inflation and rising interest rates gripped markets. Our portfolios were equal weight equities, underweight fixed income and overweight commodities . Commodities performed well and helped generate a net positive asset allocation effect for portfolios.

Security Selection

Exposure to the US factor rotation strategy (FCTR) and the European financials theme (EUFN) contributed to underperformance against the global equity benchmark. In Fixed Income, our active tilt towards short duration investment grade bonds (2022-2026) and a satellite allocation to the interest rate and volatility hedge theme helped weather the rising interest rate storm, and outperform the benchmark.

Detractors from Performance

Contributors to Performance

  • European Financials

  • US Factor Rotation

  • Emerging Market Debt

  • US Value

  • Short Term Investment Grade Bonds

  • Commodities

Underweight

Overweight

  • Technology Sector

  • Asia Pacific Equities

  • Government Debt

  • US Equities

  • Financial Sector

  • Short Term Corporate Debt

Strategic Allocation Rationale

Asset Allocation:

We view Equities and Alternative Strategies as strategically attractive relative to Fixed Income. With high inflation and a tightening Federal Reserve, we believe interest rates have further room to rise - which will weigh on income. Equities and commodities provide an effective hedge against inflation and geo-political uncertainty. We do not an anticipate a recession.

Equities:

We do not anticipate a recession, corporate profitability remains strong and the consumer's balance sheet is healthy. In the near-term we are opportunistic and in the medium-term we are bullish. While we tilt portfolios towards US Equities , we are selective with our exposures, favoring value over growth stocks.

Fixed Income:

We see the potential for a further rise in interest rates. We continue to favor shorter maturities, senior floating-rate loans and inflation protected securities. We are opportunistically adding to 2-to-4 year corporate bonds.

Alternatives:

With high inflation, rising rates and elevated geo-political uncertainty, we remain overweight commodities. We favor energy and agriculture. After an exceptional start to the year, we are carefully monitoring for a roll-over in the asset class and will take profits when appropriate.

Portfolio Changes Since Last Month

Decreased

Increased

  • No Change

  • No Change

Disclosures: This information was produced by and the opinions expressed are those of Accuvest as of the date of writing and are subject to change. Any research is based on Accuvest proprietary research and analysis of global markets and investing. The information and/or analysis presented have been compiled or arrived at from sources believed to be reliable, however Accuvest does not make any representation as their accuracy or completeness and does not accept liability for any loss arising from the use hereof.  Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated therein.   Any sectors or allocations referenced may or may not be represented in portfolios of clients of Accuvest, and do not represent all of the securities purchased, sold or recommended for client accounts.

The reader should not assume that any investments in sectors and markets identified or described were or will be profitable. Investing entails risks, including possible loss of principal. The use of tools cannot guarantee performance. The charts depicted within this presentation are for illustrative purposes only and are not indicative of future performance. Past performance is no guarantee of future results. Actual results may vary based on an investor’s investment objectives and portfolio holdings. Investors may need to seek guidance from their legal and/or tax advisor before investing. The information provided may contain projections or other forward-looking statements regarding future events, targets or expectations, and is only current as of the date indicated. There is no assurance that such events or targets will be achieved and may be significantly different than that shown here. The information presented, including statements concerning financial market trends, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons.

Market Update - Spring 2022

Investor optimism has faced increasing pressure during Q1 of 2022. Advisors and asset allocators are tasked with navigating high inflation, slowing economic growth, rising interest rates, and most recently, an escalating geopolitical conflict. As the fog of war creeps in, we recommend a disciplined data-driven approach to asset allocation and portfolio construction.

We believe the key question facing investors today is: Are we entering a prolonged period of economic contraction and negative earnings growth? If the answer is yes, then downside risk remains for equity and commodity prices (and fixed income, now offering higher yields, would screen as attractive). If the answer is no, and the global economy does not enter a recession, then there are investment and rotation opportunities to capture.

The preponderance of our data suggests that the recent market selloff has “priced-in” more than just uncertainty and indigestion surrounding the acceleration of monetary policy tightening (more rate hikes sooner). We believe escalation and extrapolation of risks surrounding Russia have forced the market to begin “pricing in” an oncoming recession. Our indicators continue to suggest low unemployment, high corporate investment, and resilient household consumption. We expect a peak in inflation and no economic recession during the next 12 months.

If our assessment of the economy and inflation proves accurate, and the FED stays flexible and “data-dependent” with rate hikes, then many investors have over-priced the fundamental risks facing markets today. As an example, bearishness, as surveyed by the American Association of Individual Investors, has averaged 47% over the last 4 weeks (as of March 17th). This level of bearishness is rare, standing 17% above average and experienced only 4% of weeks since 1988.

Understandably, transitioning from a loose monetary policy to a tight monetary policy is never “comfortable” for investors. However, history shows us that the 24 months after the beginning of a rate hiking cycle are rewarding for investors (using data since 1970). Rate hiking cycles begin when the economy is strong enough to generate inflation (demand outpaces supply) and unemployment is low. This is the state of the economy today, and we expect corporations and consumers to show resilience once again to the ratcheting up of interest rates and the cost of credit.

We continue to see evidence for maintaining economic optimism and underweighting fixed income in portfolios. Interest rates are normalizing for good reasons – high inflation, robust economic growth, and still low real yields. Within fixed income portfolios, we prefer shortduration credit (floating rate loans where possible) and inflation-protected treasuries.

We allocate the proceeds from being underweight fixed income to commodities. Commodities offer effective and efficient inflation protection for portfolios while also hedging prevalent geopolitical risks. Within commodities, energy is a key exposure that looks more attractive near-term than medium-term. We complement energy with allocations to metals (base and precious) and agriculture – both of which exhibit more impressive mediumterm supply and demand imbalances than oil.

In equities, we see less risk in US value and quality factors. As investor confidence returns and geopolitical uncertainty abates, we expect to increase portfolio exposure to undervalued international equities more leveraged to economic growth and higher interest rates (cyclicals, financials, and commodity exporters).

Opportunities and upside remain in the equity and commodity asset classes, but the texture of returns and leadership within those asset classes is expected to differ from the last 10 years. Please let do not hesitate to contact marketing@ accuvest.com if you would like to explore and discuss our real-time asset class preferences, portfolio positioning, or economic outlook.

Disclosures: This information was produced by and the opinions expressed are those of Accuvest as of the date of writing and are subject to change. Any research is based on Accuvest proprietary research and analysis of global markets and investing. The information and/or analysis presented have been compiled or arrived at from sources believed to be reliable, however Accuvest does not make any representation as their accuracy or completeness and does not accept liability for any loss arising from the use hereof.  Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated therein.   Any sectors or allocations referenced may or may not be represented in portfolios of clients of Accuvest, and do not represent all of the securities purchased, sold or recommended for client accounts.

The reader should not assume that any investments in sectors and markets identified or described were or will be profitable. Investing entails risks, including possible loss of principal. The use of tools cannot guarantee performance. The charts depicted within this presentation are for illustrative purposes only and are not indicative of future performance. Past performance is no guarantee of future results. Actual results may vary based on an investor’s investment objectives and portfolio holdings. Investors may need to seek guidance from their legal and/or tax advisor before investing. The information provided may contain projections or other forward-looking statements regarding future events, targets or expectations, and is only current as of the date indicated. There is no assurance that such events or targets will be achieved and may be significantly different than that shown here. The information presented, including statements concerning financial market trends, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons.

Commodities-An Effective Inflation Hedge

The Return of Inflation


In early 2020 COVID-19 cases were rising, job losses were mounting and the economy was shutting down. For investors and policymakers alike, deflation was a very real concern.

In response to this economic shock, governments around the world have provided record levels of fiscal and monetary stimulus. In the U.S., congress approved over $5 trillion in government spending and the Federal Reserve doubled the size of its balance sheet.

Fast forward to 2021 - with so much liquidity injected into the system and the economy recovering, inflation is now top of mind for investors and consumers. What a difference a year makes!

US-CPI-and-Core-PCE-year-over-year-in%-graph

US CPI and core PCE, year-over-year, in %

Commodities – An Effective Inflation Hedge


For investors, inflation poses serious risks, but also offers interesting opportunities.  While high inflation can erode real returns in fixed income, it can also deliver fundamental opportunities in other asset classes.

Commodities are one such opportunity.

Commodity prices are denominated in dollars, and therefore tend to rise with inflation.  An allocation to commodities can provide portfolios with an effective hedge against inflation and dollar weakness. 

Indeed, we have seen an incredible surge in commodities this year. At the time of writing, the S&P GSCI Index is up 30% YTD – easily the best performing asset class in 2021.

Where do we go from here?


The current debate among investors is whether there is more upside in commodities to be had. Some believe that we have entered the middle of the business cycle and economic growth will moderate and inflation will prove transitory. In this scenario, the outlook for commodities does not look particularly rosy. Others believe that the unprecedented government spending and still low interest rates will unleash a rapid Covid-19 recovery and extended economic expansion.

Here at Accuvest we are of the view that the “reflation trade” is not over. We continue to anticipate strong economic growth as people get back to work, accumulated household savings are spent, the Fed remains accommodative and fiscal policy remains supportive. Additionally, as global vaccination rates rise, the outlook for the global economy, particularly Europe and Emerging Markets, has improved.

We believe that the Federal Reserve would like inflation to prove persistent, not transitory. We expect the Fed to adapt their forward guidance and rhetoric to achieve this goal. As a result, we continue to anticipate inflation above 2% and recommend an inflation hedge, like commodities, for portfolios.   

 

Disclosures: This information was produced by and the opinions expressed are those of Accuvest as of the date of writing and are subject to change. Any research is based on Accuvest proprietary research and analysis of global markets and investing. The information and/or analysis presented have been compiled or arrived at from sources believed to be reliable, however Accuvest does not make any representation as their accuracy or completeness and does not accept liability for any loss arising from the use hereof.  Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated therein.   Any sectors or allocations referenced may or may not be represented in portfolios of clients of Accuvest, and do not represent all of the securities purchased, sold or recommended for client accounts.

The reader should not assume that any investments in sectors and markets identified or described were or will be profitable. Investing entails risks, including possible loss of principal. The use of tools cannot guarantee performance. The charts depicted within this presentation are for illustrative purposes only and are not indicative of future performance. Past performance is no guarantee of future results. Actual results may vary based on an investor’s investment objectives and portfolio holdings. Investors may need to seek guidance from their legal and/or tax advisor before investing. The information provided may contain projections or other forward-looking statements regarding future events, targets or expectations, and is only current as of the date indicated. There is no assurance that such events or targets will be achieved and may be significantly different than that shown here. The information presented, including statements concerning financial market trends, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons.