10 August 2015
Yes…the stock market is down. Your portfolio is down. There is no way it is not down. We just said the word “down” three times in a row. Get it? Everything is down.
If you have a decently designed and intelligently constructed portfolio you are actually DOWN more than the overall stock market! What does that mean? Most people look at the Dow Jones as their benchmark. That’s what the media tells you every night as to what’s happened. The media reports on the Dow Jones as though it’s an accurate index to let you know how the stock market is doing. Nope….As you become a more savvy investor you will learn that that the Dow Jones is just an antiquated index that means nothing. Yep….we said that! The Dow Jones means zilch!
Make no mistake about it. This is one of the strangest and least predictable markets ever…
If, however, we were to tell you the Dow Jones was about to get blasted and go down to 6,000 (currently at 17,500) it would be easy to lead you down that road. There are plenty of reasons why the market will get hurt more. Ironically enough…we could paint just as equally convincing a story of how the Dow will go to 20,000! That’s where we’re at right now. When you can find two opinions so extreme regarding the end results, yet each has its merits, you’re in a very precarious market environment.
Here’s the current summary of the MPG Core Tactical 60/40 portfolio mix, which is updated as of this writing (August 3, 2015).
Click here to compare the portfolio against the benchmark
There is a tug of war between overseas and domestic economic data. In our opinion it still leads us to think contrary to most everyone in that interest rates are not going to be raised. As we mentioned in the most recent cover piece of “the Guide”, raising rates now is almost a given move but are we seeing numbers to justify an increase? If the Fed does it they are basically forcing themselves to create some wiggle room for the future.
We’re over 70% of the way through earnings season and of those companies reporting, earnings have been down -2.5% year over year and also are lower -4.4% on revenues. The biggest data point that the Fed can use to justify a rate hike will be employment. If hiring doesn’t improve or there is no increase in wage growth you won’t see a rate hike in 2015; regardless of what Janet Yellen says.
What adjustments did we make?
7/7/15: Bought 300 shares of VEU (Vanguard FTSE All World Index) @ $47.09 ~$14k
7/27/15: Bought 200 shares of VWO (Vanguard Emerging Markets Index) @ $84 ~$7k
7/27/15: Sold 84 shares of LQD (Investment Grade Corporate Bond) @ $115.83 ~$10k
In light of how brutal markets overseas treated everyone we actually nibbled more at them. Sure there is a great chance they continue to feel pressure but we are looking long-term and buying areas of the market that could see a snap back as well as one that should bounce once things are oversold.
In the automatically rebalanced MPG Core Tactical 60/40 portfolio we made the following adjustment with cash from dividends:
7/1/15: Bought 16 shares of IVV (S&P 500 Index) @ $208.82 ~$3k
7/1/15: Bought 19 shares of BND (Vanguard Total Bond Index) @ $80.94 ~$2k
Where are we going from here?
Earlier in this article we mentioned a point about the “hedge” in your portfolio. As with any piece of a puzzle, this part of your portfolio not only needs to be present but it has to fit properly. Many hedges are not working right now as they are supposed to. Does that mean you quit on them or take the other approach and stubbornly stick with them? The answer to this can be as nebulous as the word “hedge” itself.
The bottom line for us is that we’re sticking with part of our hedging formula but actively testing other pieces. Why?
For one, we know exactly why a certain piece of our hedge has been hurt. In an ideal world the hedge piece should buffer against the recent performance slip of equities. When it comes to things like commodities, there is no secret that energy has been blasted and overly punished.
The China story is real.
Why people consider this an “emerging” economy is rather baffling. We could write an entire story on this topic but when the second largest stock market in the world has crashed in a matter of days one must look at how the spillover effects will impact portfolios. China will no longer report numbers that make economists feel as though 10% GDP growth is normal. Therefore, and allow us to be mundane in our take on this…the world will feel the aftermath. Whether China adjusts or the world eventually realizes that this is a Communist run country with accounting standards that can’t be trusted…there will be an adjustment. That adjustment is being seen in the stock markets. Take heed and trust that you have a hedge (and an actively adjustable one) in place.
All that being said, we are now researching and actively searching a part to this portfolio that will hedge against the unforeseen. That’s our final and summative take here…. If you manage money smartly you will eventually see that you are wrong before it happens. Once that day comes you need to already have a procedure and strategy in place to hedge your bets. Our next article will actively describe what we’re talking about….
We believe it’s not an environment that paints a rosy picture towards Dow 20,000. While that could happen you’re more likely to see a rough summer work through this correction. Be careful here…If things get worse each month and we see a drop of 1% to 2% in the broad market, there is a strong chance we see the market finally break down. The Dow has peeled off 1,000 points since its May 19th peak and the next thousand down won’t take more than a month or two to potentially happen. That puts you at around Dow 16,000 in early to mid September. How the last quarter of the year shakes out will determine whether this bull market is finally over. This doesn’t mean one needs to run for the hills and write off owning stocks forever. It simply means you will need a hedge built in your portfolio. Right now the hedge in the MPG Core Tactical Portfolio needs to be adjusted due to the impact of the energy sector. The potential near-term buffer is increasing exposure to actively managed currency strategies as well as our overall hunt for a more active approach to managed futures. This part of the portfolio will be critical if the markets get hit harder.
See you next month!