The Trouble with Tactical: Part 2

As readers of this blog may know, I have a bias against high-fee active investment management due to the academic research that shows persistent underperformance against benchmarks.  This is not to say that some active managers don’t beat the market, since some do – it is just that you can’t tell ahead of time which manager is going to lead the pack!

An extreme case of active management is in the pure tactical space; that is, those managers who take bets on equity and bond allocations to pick off tops and bottoms in the market.

My blog post from January and February of this year highlighted the performance and asset allocation positioning of the tactical Cambria Global Momentum ETF (GMOM); a fund that takes allocation bets based on momentum.  At that time the fund was weighted 30% in equity, 7% in precious metals with the balance in short bond ETFs.  Interestingly, its current asset mix as of Nov. 30 is still heavily weighted to fixed income with a 70% allocation, despite the S&P 500 hitting new all-time highs in November.

As expected, performance has lagged this year.  Through Nov. 30 the GMOM fund is up only 6.2% with the S&P 500 up 27%.  The whole tactical space as represented by the Tactical Allocation Morningstar Category did better at up +11.4%, but still lagged a naïve benchmark approach by a wide margin.

Those investors who looked to pick off some extra return versus the S&P 500 by being “tactical” gave up some outsized gains this year.  Best to stay the course in a well-diversified long term strategic global portfolio managed to your appropriate risk profile.

A Bit More on Active versus Passive

The following info is purely anecdotal and unscientific, but a useful bit nonetheless.

I have access to a major corporate 401-k retirement plan that has 17 active and passive fund choices; some of the active funds have an equivalent passive fund alternative.

Per the table below, this is how some of the active funds performed compared to their equivalent passive funds.  Not surprisingly, each of the active funds underperformed their passive counterpart; some by a wide margin.  Not sure if this relationship can persist, but the evidence keeps piling up in favor of passive.

A View on Negative Interest Rates

Early in my career I worked at an insurance company on the development of a new computerized investment administration and accounting system.  One of the things we had to deal with was how to handle a new asset class: zero coupon bonds, or bonds that did not pay cash interest, but instead sold at a deep discount and matured at par value.  In the current post-Credit Crisis environment, we have had a more unusual investment to deal with; bonds that “pay” negative interest rates!

Wells Fargo recently published their strategic view of how to invest in this current negative interest rate world (“Living in a Negative Interest-Rate World”, October 31, 2019).  In it, they describe the global causes, potential for it to spread to the U.S. market, and investment implications.

As seen from the chart here, this situation has grown too big to ignore.  Starting in late 2014, the volume of this debt has grown currently to over $17 trillion (though it has pulled back a bit from that top)!  The causes came from global central banks easing monetary policy through quantitative measures to help avoid a recurrence into another deep recession.  However, the jury is still out on whether this approach will ultimately prove successful!

 The U.S. bond market currently has positive rates and does not seem positioned to enter that market realm.  The authors quote some reasons, including: the U.S. has not shown a tendency toward deflation, the U.S. dollar’s dominance helps fend off negative interest rates in the U.S., and the Fed does not clearly have statutory authority to set negative interest rates.

The paper cites a few ways to invest for this market environment.  Obviously, dividend-paying equities have been a prime example of an investment alternative.  Also, bonds with some credit spread, preferred stocks, and emerging market debt can offer good value.  However, as always, it is critical to remain well-diversified and invested to your strategic risk tolerance.

More Bad News for Active Managers

The S&P Indices Versus Active (“SPIVA”) report came out today with its semi-annual update as of June 30, 2019. Perhaps to no one’s surprise, the trends uncovered from the SPIVA reporting over the last 17 years have continued.

As reported by SPIVA, “For the one-year period ended in June 2019, 71% of domestic equity funds underperformed the S&P Composite 1500, slightly more than the previous report’s 69%.” However, in a turn for the better, over this same time horizon most mid- and small-growth managers beat their respective benchmarks with 88% and 85% scores, respectively. However, the authors point to a potential problem in the data that they termed “size creep”, where small- and mid-cap managers have resorted to buy large-cap securities to help boost returns (something the indexes do not do).

Over longer term horizons including 5-, 10-, and 15-years, the results have barely budged with over 80% of active managers underperforming their benchmarks.

Likewise, fixed income investing was no exception. The report said, “The majority of fixed income active funds underperformed their benchmarks with global income funds (at 44%) the lone exception.” Also, aside from Investment-grade Intermediate funds with a 50.5% score, the balance of the taxable categories logged scores of over 80% underperfomance. This seems to defy the notion that active bond managers have a better chance at outperforming their indices since their market is more diverse and opaque and more suited to better positioning than a naive cap-weighted index.

Finally, the Great Rotation?

Many thought leaders have prophesied the Great Rotation, i.e. the relative value asset allocation shift from bonds into stocks, ever since the economy started to recover after the Credit Crisis in 2008/09.  All of those calls have been false starts since bonds continued their decades-long bull market through this September.

However, there is no denying that the total return profiles for stocks versus bonds have been quite dramatic since September 30.

As seen from the chart below, the S&P 500 has continued it tear into record territory while core bonds and other fixed income sub-sectors have given back some of the extraordinary gains earned during the first part of 2019.  The S&P 500 is up just about 4% since then, but most bond classes are clustered being modestly negative to flat over that time horizon.

There are plenty of countervailing economic and capital market forces supporting this rotation.  The most impactful force may simply be the easing of trade tensions (though nothing is signed yet) that could support stronger global economic growth (and increased inflationary expectations) causing longer term bond rates to rise while improved economies support higher corporate earnings growth leading to higher stock prices. 

It is not (is never!) clear if there is enough underlying strength for this trend to continue; we will all know if it turned out to be THE inflection point sometime in the future.  In the meantime, as mostly always, best to stay the course with a well-diversified risk-appropriate strategy.

New Fee Table Regulation for MA

Clients of investment advisers registered with Massachusetts should be prepared to start seeing a new regulatory document.  Beginning on January 1, 2020, Massachusetts investment advisory firms are required to provide a stand-alone fee table document highlighting all fees that clients can expect to be charged.  

The new stand-alone fee table will  be provided to all new and potential clients of the adviser, as well as provided to existing clients on an annual basis and whenever the table is updated.  It will also be required to be posted on the adviser’s web site. There is no new information on the table; it is simply a re-formatted carve-out of existing material contained in the Form ADV Part 2 Items 4 and 5.

The federal regulator, the U.S. Securities and Exchange Commission (SEC), and no other state requires this so it is unique to Massachusetts.  The form is designed as a template for all advisory forms to fill out.  Because it is a template, it should be easy to compare Massachusetts advisers with each other, but not so easy to compare with SEC-registered or other state-registered advisers.  Interestingly, for advisers registered in Massachusetts with a principal place of business outside of Massachusetts, the table is only required for clients who are Massachusetts residents.

Odd October

October 2019 was an odd month for the capital markets.  The S&P 500 produced another all-time high and generated a 2.2% total return (IVV) for the month, but some of the other stellar performers during the year lagged while other surged.  Let’s look at each of the major sectors that deviated from the norm.

High dividend stocks have been strong performers since the Great Recession in 2008/2009 mostly matching the 10-yr total return of the S&P 500, but generating much more income that is a positive trait for investors looking for spendable income.  However, the return profile has not been smooth as YTD performance in 2019 has been lackluster with some lags.  October is no exception with many of the major high dividend ETFs lagging the S&P.

Likewise, previous YTD stars in the equity space like factor exposures in low volatility and momentum took a breather from outperformance in October.  The USMV and MTUM ETFs from iShares representing min vol and momentum lagged the S&P 500 in October with total returns of -0.23% and 0.65%, respectively.

Meanwhile, developed and emerging market equities represented by SCHF and SCHE took a shot at catching up with the U.S. market with some material outperformance with respective monthly returns in October of 3.14% and 5.33%

In the fixed income arena we saw some normalization of returns that were outsized during the first three quarters of 2019.  Unless the U.S. were to follow the majority of the developed world into negative rate territory, bonds had to give back its extraordinary YTD gains earned prior to Sept.  Such was the case in October as all sectors in the fixed income space produced flat to negative returns.

The capital markets are dynamic and sector leadership will constantly rotate as fundamental, technical and behavioral factors play out.  It is not reasonable for long term strategic expectations to play out each and every month, quarter, or even year.   

Investments 101: The Trouble with "Cap-weighting"

The S&P 500 index is the most popular large capitalization stock index in the U.S.  It includes the 500 largest stocks in the U.S. and is diversified across a broad cross-section of different industries.  It is a “capitalization-weighted” index, meaning the composition mix of stocks is weighted by the market capitalization of each stock in the index.  For example, Microsoft (MSFT) currently has a market cap of over $1 trillion dollars (equaling its current share market price times its current shares outstanding).  This huge market cap influences its weighting in the S&P 500 index; it currently has a weighting in the S&P 500 index of just over 4%!

In fact, there are many other “mega-cap” stocks that also hold a large position in the S&P 500 index.  Other large names include Apple, Alphabet, Amazon, Facebook, Berkshire Hathaway, JP Morgan, Johnson & Johnson, and Procter & Gamble; mostly stocks with a “growth” bias.  The top 10 holdings in the S&P 500 make up 22.1% of the index.

To the extent that these largest stocks in the index perform either well or poorly will impact the results of the index disproportionately.  Over the last three years, “large growth” stocks have had a great run as shown by their 16.0% compound annual return on the chart below (shown by the growth ETF, IVW) compared to the S&P 500 return of 14.1% (SPY) and the S&P 500 on an “equal-weighted” basis return of 11.8% (shown by the equal-weighted ETF, RSP, where each stock in the index holds a 1/500th weighting).

Though it is nice to capture the “upside” of the large overweight to “growth” stocks, it will not be so nice to experience the downside risk that is sure to follow it someday; growth stocks tend to exhibit more volatility of return than the S&P 500.  Best to stay broadly diversified across all market sizes and characteristics to capture the inflection points when they occur.

Investments 101: Price vs. Income Return

There are two components of total return: price and income.  Price return is the change in price from the beginning to the end of a period.  Income return is the amount of income generated from the beginning to the end of the period.  Total return is the combination of price and income return.

For an example, let’s consider the iShares Select Dividend exchange-traded fund (ETF)(DVY).  Per the chart below, over the last year ended October 18, 2019, DVY produced a total return of 7.9% and a price return of 4.1%; leaving the income return to be 3.8%.  What does this mean and why does it matter?

Retirees often look to their investment portfolio to generate some “spendable” income to supplement pensions, annuities, or social security benefits.  Income return is paid in cash and can be used to pay for ongoing expenses or financial goals.  Price return can also be used as spendable cash, but that involves selling shares to realize gains (hopefully!); and that is the problem!  Since no one knows when price return may be up or down, there is the risk that share price is down when you are selling; of course, not a good thing!

Different asset classes have different price/income return profiles.  For example, as in the DVY example above, equity (stock) investments tend to have higher price return compared to income return.  Bonds, on the other hand, generally have a larger income component.  There are times, however, when the income return from equities is HIGHER than for some classes of bonds (as it is now!)  This is a period of time where high dividend-paying stock investments are especially attractive compared to bonds.

For an investor with a need for an income-focused investment strategy, it is important to understand the specific underlying characteristics of the asset classes to be sure they are carefully selected and weighted to provide the appropriate mix for the investor.

For the investor who decides to spend the income component, it works out very well that the price component is still generating price return (hopefully positive over time).

The Best Ideas in AI Portfolio Management

One of the most interesting things emerging in the investment realm is the use of artificial intelligence (AI) in portfolio management.  There are a few exchange-trade funds (ETFs) that are managed with the assistance of AI, including AI Powered Equity (AIEQ), QRAFT AI-Enhanced U.S. Large Cap (QRFT), and others.  Is there anything we can learn from them?  What are their “best” ideas right now, as indicated by their top holdings?

AIEQ has been around since October 18, 2017.  Since inception through October 17, 2019, it has produced a net cumulative total return of 16.2% compared to the S&P 500 (SPY) of 21.5%; quite a bit of a lag, though AIEQ has at times been ahead of SPY on and off over this time horizon.  In fact, AIEQ is currently beating the S&P 500 on a YTD basis through October 17, 2019 with a return of 22.34% compared to 21.4% for SPY.

How do the top holdings for AIEQ compare with SPY?  The usual suspects like Alphabet, Amazon, and J&J are in AIEQ’s top 10.  No Microsoft, Apple, or Berkshire Hathaway; though they are in the AIEQ portfolio, just smaller weightings.  Big positions in Intuit, Martin Marietta Materials, Thermo Fisher, Moody’s, Waste Management Corp, and NetApp round out the top 10.  Year-to-date total returns for these top holdings have been impressive:  Intuit, +36.4%; Martin Marietta, 56.24%; Thermo Fisher, 26.08%; Moody’s, 57.29%; Waste Management, 32.39%; and NetApp at -6.52%!  Lots of big winners there!

Though AIEQ has a high reported turnover of 260%, most of these top holdings have been around since the beginning of the year; and held through the market downturn in May 2019.  From a portfolio management perspective, I am happy to see consistency in overweighted positions reflecting a long term approach to “high conviction” holdings; holdings that warrant a high portfolio weighting.  Not sure if the typical active “human” portfolio manager would be as wise.  Let’s check back in six months to see how it is working out.

Why "Active" underperforms “Passive”

Much has been written about the “active versus passive” investment management debate.  In my last blog post on October 10, 2019, I recounted the basics and the work shown by the SPIVA U.S. Scorecard.  The Scorecard showed that for the one-year period ended Dec. 31, 2018, “for the ninth consecutive year, the majority (64.49%) of large-cap funds underperformed the S&P 500.”

New research recently posted on the CFA Institute blog website (at https://blogs.cfainstitute.org/investor/2019/10/03/the-active-manager-paradox-high-conviction-overweight-positions/) takes a shot at explaining the cause of this situation.  In the article, the author studies a key parameter named “High Conviction Overweights” defined as the active manager’s “best” ideas that are represented by overweight positioning; somewhat analogous to the “active share” work done by others.

The conclusion:  high conviction overweights, compared to underweights and neutral weights, were the only source of stock selection alpha.  Paradoxically, the High Conviction Overweight positions were shown to be capped to an average overall portfolio weight of 55%; a weighting that is not high enough to propel the portfolios to outperformance.  It is theorized that portfolio managers are averse to too large overweights due to the problem of high tracking error and the potential for significantly lagging a benchmark (i.e., business and career risk!).  Regardless, the lack of a larger allocation to high conviction positions was a drag on outperformance.

The author used plenty of statistical tools to support their thesis and invites other academics to start researching this phenomenon. More work to be done on this research, for sure, but curious to see if this study causes active managers to change their portfolio management approach.

Active Versus Passive Snippet

From my recent blog post on long term strategic investing, most readers will understand that I prefer a well-thought out steady and slow approach to portfolio management.  A broadly diversified strategy across all of the major asset classes will help to smooth the return profile to achieve financial goals.  As they say, it is not “market timing” but “time in the market” that helps create wealth!  But, where does the return really come from?  What is the best way to get exposure to broad asset classes? One aspect of these questions obviously leads to the “active versus passive” management debate.

Simply stated, passive investing employs rules-based index investments to create a risk-based portfolio.  Recently, a fully diversified global multi-asset portfolio of passively-managed exchange-traded funds (ETFs) can be built for well under a 0.15% underlying investment expense ratio.  On the other hand, active investing uses stock and bond pickers to actively select (and de-select!) stocks and bonds as part of an investment strategy.  The average expense ratios for active large blend stock strategies can cost 0.75% (or more!)

S&P Dow Jones Indices has produced the well-known semi-annual updates on this debate titled the “SPIVA U.S. Scorecard”.  At year end 2018, the active versus passive debate continued to show active managers lagging their passive benchmarks.  The most recent report includes 37 pages of text and tables, but the summary headlines are telling: “2018 was the fourth-worst year for U.S. equity managers since 2001; 68.83% of domestics equity funds lagged the S&P 1500 during the one-year period ended Dec. 31, 2018.”  Also, “for the ninth consecutive year, the majority (64.49%) of large-cap funds underperformed the S&P 500.”

Of course, it would be great if you could just “avoid” the 68.83% that underperformed!  Unfortunately, it is not that easy!  According to SPIVA, through work published in their Persistence Scorecards, “relatively few funds can consistently stay on top.”

Check this link for more info on this topic:  https://us.spindices.com/spiva/#/about

Q3's Not-so Wild Ride

Consistent with the trends we saw earlier in 2019, Q3 showed more geopolitical turmoil and global trade concerns (China, Brexit, etc., ad infinitum!), as well as market-moving “tweet storms.”  Economic activity continued to plod along in the U.S. mostly due to strength in consumer spending and improved incomes, but key weakness in the important ISM Purchasing Manager’s Index (PMI) in August caused some pause.  Responding to global trade concerns and signs of weakness, as well as the dynamics of a “yield curve inversion,” the Fed took short rates lower with rate cuts in July and September.

The hilly path the capital markets followed over the last year continued during Q3.  The “rolling hills” of the S&P 500 showed a small incline in July offset set by a small descent in August.  September improved on that trend to show a +1.87% grade with a Q3 total return of 1.70% (including dividends).  The Q3 performance amongst other sectors in the capital markets was not symmetrical, however.  Small (SCHA) and mid-cap U.S. equities (SCHM) lagged (-2.08% and -0.56%, respectively) while factored carveouts like low volatility (USMV) and high dividend (DVY) outpaced due to the rally in “value-type” stocks (+4.31% and +3.37%, respectively).  Also, international developed markets (SCHF) and emerging markets (SCHE), trailed the U.S. market with Q3 returns of -0.72% and -4.23%, respectively.  The big winner during Q3 was U.S. real estate investment trusts (SCHH) with a +6.84% total return.

Likewise, fixed income assets tolerated a bumpy uphill ride.  After a strong rally in August, core bonds (SCHZ) settled down to produce a +2.31% total return during Q3, while investment grade corporates (LQD) and preferred stocks (PFF) logged better grades of +3.36% and +3.19%, respectively.  Lagging core bonds were assets with very short durations such as short corporate bonds (NEAR) with a Q3 return of +0.70%.

So, the ride thus far is helping us get to our goals, but not without some bumps.  As I said on my August 23, 2019 blog post, “Buckle your Seatbelts!”:

“In this market environment of jawboning and innuendo, there is no sanctuary; except to be broadly diversified.  All those smart guys that overweighted short agency paper anticipating rising rates missed out big time on the benefits of investment grade corporate bonds and aggregate-style core bonds.  Duration and high quality credit are the big winners this year on a risk-adjusted basis.  Even high yield bonds, emerging market bonds, and preferred stocks proved their worth!”

As a postscript, I am happy to recall and highlight one of my favorite charts of the year; a Wall Street Journal survey showing that not ONE economist forecast lower rates in 2019 (see my June 13, 2019 post here: https://www.dattilioash.com/our-blog/2019/6/13/interest-rate-forecast-foible)!

The Value of Long Term Strategic Investing

I learned many things from my 29 years helping to manage the general account investments for conservative insurance companies.   One of the most important is the value of long term strategic investing.

We managed many different accounts backing different types of insurance products including life insurance, annuities, and guaranteed investment contracts.  Each account backing a different insurance product had its own investment policy statement highlighting the portfolio policies, procedures and parameters (“the “PPP”, as we called it).  The focus of the PPP was to develop a long term investment strategy appropriate to the characteristics of the liability that would perform well over a long term horizon.  This does not mean that short term “tactical” positioning was not used - it was; just as a smaller and more limited component of the overall strategy.

This approach served the company well.   In fact, the best performing account invariably was the investment account backing a closed block of life insurance products. Granted, it might be because of the record long bull market in bonds and that segment’s focus on long duration fixed income assets, but it still demonstrates the value of long term strategic investing.

The account was broadly diversified amongst many asset types including government bonds, corporate bonds, private placement bonds, commercial mortgages, real estate, and common stock.  As much as we would have liked to fiddle with the strategy to extract some extra return from tactical positioning, there were regulatory restrictions limiting changes in the strategy without prior regulatory approval.  Consequently, the PPP was never changed during my tenure there and it kept behavioral biases from slipping in to potentially disrupt the return flow.

Additionally, it also limited “bad” investment decisions from creeping into the mix since strict investment guidelines and underwriting standards limited the potential flaws that “active” management could foster.  More on this topic in my blog post next week where I discuss the long-running debate on active versus passive management!

Away for a while...

Investment ramblings to ruminate while away…

• Glad to see “value” plays getting some momentum recently

• Will negative rates come to the U.S.?

• Tough market for thought-leaders betting on higher rates in 2019, but no one remembers those calls

• As much as I love bonds, the bond rally can not persist and is not sustainable… famous last words!!

• Hard to believe how far GE has fallen from grace; a great American company subject to bad bets and poor management

• Being a fiduciary is what investment management is all about; doing what is in your clients best interest. It has nothing to do with selling investment products… though that is how it has been run from Wall street… the sooner we hold “salesman” to higher standards the better.

Volfefe?

Back on August 23, I postulated that this is an “historic” time of market volatility prompted by a most diverse set of factors, including the phenomenon of the “Trump Tweet”.  Sure enough, Wall Street came through with an attempt to measure it!

JPMorgan, Citigroup, and Bank of America Merrill Lynch all have taken a stab at measuring the impact of the tweets.  Turns out, according to Merrill Lynch, when Trump tweets relatively frequently we see negative stock returns of 9 basis points on average as opposed to days with relatively fewer tweets with positive returns of 5 basis points on average.

The JPMorgan “Volfefe Index” is more focused on the impact on Treasury yields.  “They found that the Volfefe Index can amount for a measurable fraction of moves in implied volatility…”

See this article on WSJ for more info:  https://www.bloomberg.com/news/articles/2019-09-09/jpmorgan-creates-volfefe-index-to-track-trump-tweet-impact

Quite Contrary

This Labor Day week started ominously with a weak PMI stat under 50 indicating contraction in the manufacturing sector for the first time in 35 months.  A second round of weak stats came through at the end of the week with monthly non-farm payrolls showing up at 130,000 and under expectations.

Some positive influences were evident, too, with the labor participation rate increasing to 63.2% and wage gains beating estimates driving hope that the consumer will continue to spend and keep the economy chugging along.

Taking any one stat by itself would cause one to come up with narrow, and certainly, flawed conclusion about where the markets are going.

So, this battle of countervailing forces caused the equity markets to go… UP; and the bond market to go… DOWN.  It seems that the markets liked these stats with positive leaning expectations; if nothing else, tilting the scale to encourage a Fed easing.  But, we still have a global slowdown with trillions in negative yielding bonds causing a flight to US dollar-denominated debt as a driving force to push US rates low… which force will win the battle?  Not to mention the continuing repercussions of the US-China trade issues… And, so it goes…

Quick Post: PMI of 49.1% shows manufacturing contracts in August

Readers of this blog know I have been an advocate of the ISM PMI as a very strong component of leading indicators for economic growth and corporate earnings health. Today’s drop to 49.1% indicates a contraction in manufacturing growth (first such sign in the past 35 months!) and is a warning sign that needs to be considered within a full context of other factors.

Long-term strategic allocations to equities with a low volatility profile and fixed income with some duration exposure should outperform core positions in this environment. Higher quality investment grade corporate bonds, likewise, could provide ballast to core equities.

Divide and Conquer!

If you are an investor in a high marginal tax rate, total returns from tax-free municipals have been fine this year, but certainly a laggard compared to the returns generated by investment grade corporate bonds, high yield bonds, and other fixed income sectors.

The iShares National Muni Bond ETF (MUB) has produced a total return YTD through August 31 of 7.22% with a most recent SEC yield of 1.48% (tax-free!).  Alternatively, the iShares High Yield Corporate Bond ETF (HYG) has produced a total return of 10.84% with a most recent SEC yield of 5.18% (taxable). On a pre-tax equivalent at a 30% marginal tax rate, HYG still has a yield advantage over MUB by a wide margin; 2.11% versus 5.18%.  So, you will pay more tax, but still end up with more incremental income; being careful not to jump into a higher tax bracket.

Additionally, a comparison of these two bond ETFs shows some interesting statistics.  First off, they are not too correlated with each other with a 10-year correlation of only 0.10; in other words, no correlation - a good thing from a portfolio construction perspective!  HYG is obviously a riskier proposition than MUB with a 10-year standard deviation of 7.03% versus 4.53% for MUB.  But, the Sharpe ratio of excess return per unit of risk is mildly advantageous to HYG over MUB by 0.91 versus 0.83, respectively.

The performance trend line for fixed income sectors with some duration or credit risk, including HYG, has done especially well this year.  Long-term strategic investors should already have a position in duration and credit in their portfolios this year and reaped the rewards of broad diversification.  This is in no way a market call given the aggressive rally this year in duration and credit risk instruments, but a well-timed entry given today’s market situation can complement income and portfolio diversification.

Quick Post: Buckle Your Seatbelts!

The word “historic” is often overused.  Since last December, the capital markets have defied all prognosticators by recovering from the depths of a disastrous Q4, a dire month of May driving most tacticians to the hills, and plenty of positive and negative tweet storms.  I don’t think anyone measures this, but the market’s ability to “react” and “recover” from such a diverse pool of factors seems “historic”.

Today is no different.  On the cusp of a market recovery, a new tweet storm today caused equity markets to sell-off big-time.  Trump escalated the trade war by tweeting that US companies should look for other suppliers instead of China (something that is already happening, by the way).  The reaction was obvious. 

In this market environment of jawboning and innuendo, there is no sanctuary; except to be broadly diversified.  All those smart guys that overweighted short agency paper anticipating rising rates missed out big time on the benefits of investment grade corporate bonds and aggregate-style core bonds.  Duration and high quality credit are the big winners this year on a risk-adjusted basis.  Even high yield bonds, emerging market bonds, and preferred stocks proved their worth!

Keep your seat belts buckled!