At the start of the year, markets were driven higher because of the more dovish Fed (see our previous newsletters “Thank You Fed I & II“). This is now priced in. On top of that markets pushed higher on hopes of a US-China trade agreement. This has now been partially priced-in as well. We are now in a situation where the S&P500 has completely reversed last year’s correction and has a year-to-date performance of +18 %. The question is, can the index continue higher?
According to data from EPFR Global, not everyone participated in the 2019 recovery. From Q3 2018 to Q1 2019 investors have sold $147 billion of equity funds and ETFs. $66 Billions left in Q1 meaning investors fled the market even as it rallied at the start of the year. Panicking and leaving the market at a corrections is a common and understandable reaction which leads to the next question: When should an investor get back in?
One solution to this question is not to have that question pop up in the first place. This can be done by following a rules-based system that leaves little room for judgement, personal psychology and regrets. Not all strategies work all the time and sometimes it is more profitable to ride the S&P500 ‘naked’, that is without diversification or a hedge. But having a rules-based system makes it easier to always be in the market and participate in long term returns.
Speaking of hedges, usually stocks and bonds are inversely correlated and bonds are used to hedge portfolios when stocks fall. Both 2018 and 2019 have been an exception. In 2018 both asset classes turned negative for the year while this year both asset classes are rising together. For this April, normality is back with SPY at +4% for the month while TLT at -2%.
The fact that stock and bonds both gained in Q1 2019 is the reason that our 3x Universal Investment Strategy has done so well. The strategy invests in stocks and Treasuries using leveraged ETFs (SPXL and TMF). It’s non-leveraged cousin, the Universal Investment strategy has returned less since it also uses gold and TIPS.
The best strategies for the month were the NASDAQ 100 strategy with +2.24% and the Leveraged Universal Investment Strategy with +1.69%. Our three CORE portfolios (Conservative, Moderate, Aggressive) returned 0.8%, 1.19% and 1.39% respectively.
Where is inflation?
What is puzzling is gold’s consistent under-performance. Part of the reason is the exceptional performance of the dollar index, which is inversely correlated to gold and is now sitting at multi-year highs. Another reason cited is low inflation. But is inflation as low as indicators show? We are keeping an eye on gold in case inflation decides to pick up by making it available in many of our strategies.