Portfolio Update – June 2022

The half-time whistle has sounded for 2022, and it is one of the worst first halves in a very long time for the stock market - not since 1970 has this US stock index declined more than 20% in the first six months of a year. Coincidently, that was also a time of rapidly rising inflation and rising rates to combat it, which echoes in this market decline, albeit there are many structural differences between the two compared years.

A decline of more than 20% also famously (or infamously) is the mark for when investors consider a bear market to officially have begun. While stocks have recovered slightly in the first part of July to get back on the right side of that limit, it is still clear that this current market environment is not fitting stocks at all.

As predicted a month ago in the May 2022 monthly update, the Fed's chairman Powell has increased the steering rate by 75bps to 1.50%, and as non-farm payrolls came in stronger than expected for June (372k added jobs vs. expected 268k), there is room for further sharp hikes from the the US central bank as the hikes so far have not adversely impacted the employment rate, why further hikes would be possible without hurting the economy as much as first feared. It is likely that the Fed is chasing a recession as it is currently only focusing on inflation as stated by J. Power after the June meeting, why rising rates can be expected into a recession.

The commentary on the latest Macro Voices episode with an interview of Jeff Snider (7 July 2022), is however that from looking at the eurodollar curve, the market expects some additional hikes into the autumn and end of 2022, before the Fed lifts its foot from the throttle and perhaps starts easing again into 2023/2024. This possibility is something to bear in mind while allocating assets ahead, but much uncertainty remains.

Let us take a closer look at how this all affects the markets and my All Seasons Portfolio.

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Portfolio Update – May 2022

Market update of May 2022 includes a growing dependency on the next few inflation prints, as these will determine the strength of Fed's reactions and in extent the direction of the stock and bonds markets.

With negative QoQ real GDP growth in the US and continuing high inflation, we are not far from a technical recession and truly entering a stagflationary environment. While not there completely yet, the risk will put pressure on growth assets and nominal bonds, why broader exposure to other assets is recommended.

In my All Seasons Portfolio, the above factors impacted monthly returns negatively, but I expect my strategy to be prepared for the uncertainty ahead with continuing overweighting to inflation assets.

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eToro Post – How Strategic Rebalancing Helped Avoid a -35% Loss in Long Treasury Bonds

Since I joined eToro in April last year, I have been sharing insights and observations about investing with risk balanced strategies such as the All Seasons Portfolio (“ASP”) strategy I run here. As eToro is a social trading platform, I from time to time share content in my eToro feed, which I then share on the blog in posts like this.

As part of my All Seasons Portfolio, the asset classes have a set aimed allocation, which is based on their historical volatility and correlations and biases to different economic regimes. For rebalancing the portfolio, I apply rebalancing spans that allow assets to deviate from the aimed allocation with +/- 20%, unless it is in a trend.

Such rebalancing trigger occurred in March 2022 for Long-Term Treasury Bonds, as its weight had fallen by more than 20%, but as it was in a clear negative trend, rebalancing was postponed until May 2022.

By waiting with the rebalancing, I managed to avoid a loss of more than 35% on the position I would have taken in March (or -2.5% on a portfolio level).

In this post, we describe in a bit more detail the benefits of applying such strategic rebalancing rules.

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eToro Post – Delayed Planting Season in the U.S. Threatens Crop Yield

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The big news surrounding CBOT traders the past few weeks is the very wet and unusually cool weather this spring in the northern U.S. Plains, affecting farmers in North Dakota, northern Minnesota and parts of South Dakota.

For example, the planting progress for North Dakota corn reached 20% last week, compared to a 66% annual average at the same point in time in previous years, while spring wheat recorded 27% completion versus a 80% average.

The numbers are, in other words, far off from a typical year. The similar grim story is told for soybeans, albeit these are less delayed than wheat and corn on a nation-wide level, but with North Dakota (the fourth largest soy area in the U.S.) being again significantly behind.

The wet conditions have made it difficult to get the crops into the ground, with the U.S. corn planting running at the second-slowest pace in more than a quarter century, and spring wheat planting being THE slowest on record.

In this article, originally posted in my eToro feed, we take a quick look at what consequences can be expected from this late planting of vital crops.

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eToro Post – Where does the All Seasons Portfolio fit in your wealth structure?

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A common question that I get around the All Seasons Portfolio strategy from investors, especially asked by the not-yet-old ones, is why one should invest in a low risk portfolio with decreased volatility. The less skeptical investors also add a question about where the ASP fits in one’s overall wealth allocations.

Naturally, regardless your age and investment horizon, lower risk portfolios are beneficial as they reduce the stress experienced during panicked markets. Even though the expected absolute return any year is also lower, the decreased volatility will mean a smoother ride with similar long-term annual returns

Mainly, it is a matter of narrowing the cluster of outcomes of each year around a mean, and avoid the big swings from one year to the next. But it doesn't necessarily mean you should devote all your savings to a low-risk strategy and completely abandon the more "exciting" investments.

When this is understood, a common follow-up question is where a portfolio such as the All Seasons Portfolio fits in the management of your overall wealth.

The All Seasons Portfolio should be the stable portfolio at the core of your assets, on top of which you can build with riskier investments. Therefore, to better understand this, in this post, first published on my eToro feed, we explore more closely how it fits in your personal finances.

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Portfolio Update – April 2022

Market update of April 2022 includes a continuing emphasis on interest rate risk on the back of rising inflation, albeit recession fears raise questions of the timing of rate hikes and the impact on the economy. We'll analyze what the indicators tell.

As a result of the current inflationary environment, strongest portfolio performers include commodities, gold and VIX in April, but much of the profits were offset by losses in bonds. Portfolio overall remained stable.

In my strategy, a couple of tweaks have been implemented last month: i) tactical tilt toward inflation-linked bonds from nominal bonds, and ii) introduction of leverage through margin. Read more about these changes in this month's post.

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