Contents of this month’s post include:
- Market Update of the current economic regime
- Monthly Portfolio Update for December 2022 with a fresh set of charts
2022 is over at last, and I am sure many have been looking forward to be closing the books for this eventful year and again start focusing on what lies ahead instead.
It has been one of those extremely rare years where three of the major asset classes – stocks, bonds, and gold – all have a bad year at the same time. This, of course, has had a negative impact also on the All Seasons Portfolio. While it is disappointing, this is an opportunity to train humility and remember that no strategy is always going to perform every year. Rather, over a cycle, we will witness good excess return over cash at lower volatility than the stock market.
At the time of writing this post (which comes out a bit late) 2023 has already commenced much stronger, and we are out the gates at a very good pace. While it is far too early to count the chickens before they hatch, at least we are getting some respite from the sour emotions of yesteryear.
But before we look at the portfolio performance for the lat month of 2022, let’s take a quick look at the macro environment.
December 2022 Market Update
First, the usual reminder regarding the All Seasons four-square matrix of macro factors, as more or less all market moves can be traced back to essentially two forces: inflation and economic growth, and especially positive and negative changes in expectations of these.
That gives rise to four possible market regimes, as a combination of the two factors can be summarized by a matrix of four squares with inflation and economic growth on on axis each. The four possible regimes are this inflationary stagnation, inflationary boom, deflationary bust, and disinflationary boom.
This will serve as a backdrop for for the below summary of what market regime we are currently in, which might help us explain changes in asset prices.
In what market regime are we now?
At least when we are looking at the US, it appears as if inflation is no longer the most important story in the news. The headline inflation rate has been coming down for six consecutive months, albeit it remains at a historically elevated level. The December 2022 print came in at 6.5% YoY, down from 7.1% in November. Also core inflation (inflation ex. food and energy) is rising, but at a much slower rate than before, coming in at 5.7% in December.
Headline inflation rate (left) and core inflation rate (right) in the US in 2022.
In the Euro zone, the story remains different from the situation in the United States. Perhaps this confirms the old saying that Europe lags the United States by about six months when it comes to inflation.
The headline inflation rate has come off the top figure from the October of 10.6%, with 9.2% being reported in December. This is still an unusually high number, but we shall keep an eye out on the developments in the coming months. Additionally, the core inflation rate keeps pushing higher, having been reported as 5.2%.
Headline inflation rate (left) and core inflation rate (right) in the Euro zone in 2022
With natural gas and electricity prices being somewhat lower thanks to the milder winter to date, energy prices (excluded from the core inflation rate) have dropped from the highs in the summer of 2022. Moreover, supply chain disruptions are not as bad as they were a year ago, why we might even see the core inflation rate too beginning to trend downward. However, the ECB has been far from as hawkish as the Fed in pushing higher interest rates, albeit the European economy has not been running as hot as the American one, why as high rates may not be necessary (or even possible).
To add a bit more flavour to inflation, I have been working on the below chart for another post, but which is relevant to share also in this forum. This is a summary of the yearly headline inflation rate per month over 2022 in a selection of developed countries, just to provide a better picture of the situation.
Only in Sweden and Japan was the December inflation reading the highest figure over the last twelve months, albeit Italy and the UK were close to joining this particular club. Czechia has a high exposure to the rising energy costs where housing and utilities make up 27% of the headline CPI, which explains why the Czech inflation has been so relatively elevated this past year.
Turning to the economic growth perspective, reading the news during the latter part of 2022 has not been if a recession will occur, but when it will hit.
The United States went through two quarters of negative GDP growth (Q1 and Q2), when the talking heads in media discussed technical recession versus actual recession. However, in the second half of the year, the GDP growth again turned positive, with economists and investors expecting a slowdown in 2023.
GDP Growth in United Stats (left) and Euro zone (right). Source: TradingEconomics
Notably though, the depicted charts show nominal GDP growth. In real terms, the added dollars in the economic size, did not set off their decreased purchasing power. While the economy seems to have growth, the aggregate wealth has not.
On another note, I came across the below interesting chart the other day, showing the loss of purchasing power among US consumers. While the Covid stimulus checks allowed millions to pay off more of credit card debts (a possibility further promoted by lockdowns that made spending on services rather difficult), the credit card debt is now back on its long-term trend line, after a major surge in 2022. The axis depicts billions in USD.
In this light, remain skeptical of the rosier outlook and soft landing possibilities. The surprising non-farm payroll data from 3 February when the US added 517k jobs was a surprise to the upside (which was bad news for the stock market, as good news for the economy allows the Fed to raise rates further). The environment is difficult to navigate, but luckily, I don’t have to. I will stay on course by following my portfolio strategy of being prepared rather than trying to predict.
Let us now that a quick look at the usual charts of inflation and economic growth trends.
Both inflation and inflation expectations are falling steadily in the US. Perhaps the inflation related narrative is behind us, and the more important story to follow is the story of the wellbeing of the economy.
Real economic growth remains very low, and the forward-looking growth indicator of the American PMI just keeps declining. While the stock market has been bouncing in the last months, one should be cautious if the underlying economy is not doing as well – especially if the Fed is taking liquidity off the market by not being as accommodative through its quantitative tightening policy.
Right: 5Y Breakeven rates and US PMI
(click to enlarge)
With the next two usual charts, we depict the trend in historical inflation and growth, as well as forward-looking expectations. Each data points are measuring the difference between the latest number and average of the previous 12 data points, where the larger dots being the latest numbers (the yellow diamond being the last measure).
Right: MoM change in %- of US 5Y Breakeven rate vs. PMI to the right (difference of datapoint for month n minus prev 12m avg)
Yellow diamond marks the latest datapoint, with the previous in order of size.
We see that the inflation trend is really beginning to fall, as we are moving further down on the left-hand-side chart. The trend in growth is, however, not that clear, as we are currently very close to the middle of the horisontal axis. That means that growth is slow (as shown in the previous set of charts), but that it is not moving in any clear direction – just hovering around the same low prints.
The same cannot be said about the trend in the forward-looking indicators, as the cluster of datapoints in the left half of the right-hand-side chart shows. This depicts that the trend in PMI remains negative, so if this is a reliable indicator, caution is advised.
But if you review the forward-looking indicators, by the trend of the PMI (horisontal axis of the graph to the right), this is moving further and further toward the left and higher negative numbers. That does not bode well for what might lie ahead.
In other words, it appears we are moving toward the disinflationary bust quadrant, as inflation appears to be coming down, while growth is still lagging.
Hence, the spotlight is no longer as much on inflation as it has been, but rather on economic growth and guesses on its direction. If we in 2022 saw a joint decline in stocks and bonds (as they tend to move downwards in tandem when inflation surprises on the upside), it is likely that we in 2023 rather will see a tug of war between stocks and bonds as the growth/recession story develops.
The correlation between the two assets is also likely to fall now that focus is no longer on inflation, even though correlation has been more positive than we have gotten used to (see below).
But at the end of the day, the beauty of the All Seasons Portfolio strategy is that we are not making any predictions, but rather prepare for any outcome, and hold out for the long term.
Interpreting all charts above, we now have a good understanding of the current environment. Let’s therefore continue to look at my All Seasons Portfolio to see whether theory translates to reality.
If you are looking for getting started with your own All Seasons Portfolio and need some inspiration, check out my post on How to get started with the All Seasons Portfolio strategy. While stocks have been a great investment the last decade, there are no guarantees that this trend will last, as their continued success depends on several factors. Instead, consider diversifying your portfolio to include other asset classes, and benefit from the rebalancing period over the long-term, as described in this article.
December 2022 All Seasons Portfolio Update
We close the accounts for December for our portfolios in a similar manner as many other months in 2022, namely with a loss, albeit a smaller one this time. (Spoiler alert: January was much better, but we’ll get to that in due course).
If we start with my eToro portfolio, which is an All Seasons Portfolio that is levered 1.34x times, the portfolio ended December by declining 3.4%.
While there appears to be a great and sudden loss in carbon credits from the below chart, that is not quite the truth, as the KRBN ETF had a massive 23% dividend in December. Net, it had barely moved at all over the month, having contributed to the portfolio returns by a mere 0.09%.
Gold has bounced back in December after a less than impressive year (in dollar terms).
Turning to the return contribution, the below illustrative summary shows how stocks and bonds positively made up most of the portfolio’s return this month. Here you also see how relatively little impact the declines in VIX and cryptos had on the whole portfolio.
I still have a slightly lower allocation to stocks and treasury bonds in this environment where the correlation of these two asset classes is elevated while inflation uncertainty remains. In December, this did not work out as well as it has over the course of thole second half of 2022 where this tilt has saved me from some losses in the bad months.
On the flip side, this has mean that I have a higher allocation to gold, which has also bounced back in the last month of 2022, and contributed positively to portfolio performance and making the month less disasterous.
If you are already on eToro, make sure to follow me there too, as I from time to time share brief updates there directly about that particular portfolio. The updates I share on this blog will however remain deeper and more insightful. Otherwise, make sure to click the banner below and create an account, (and support the upkeep of this blog financially at the same time by using the affiliate link!).
Follow me there by finding user Allseasonsport. And feel free to copy my portfolio there with a small amount of your portfolio if you want a more hands-off approach to risk parity investing. I do all my trading there in a systematic and rule-based manner, and already have several copiers (excluding friends and family). I very much appreciate this copy investing functionality, as it makes it easier to follow other people’s strategies, while the investors like myself that are copied have skin in the game as all trades are done with my own money.
As for my DEGIRO All Seasons Portfolio, November was also a good month, albeit not as good as on eToro. The difference is mostly made up by different levels of leverage, as well as the fact that the portfolios are denominated in different currencies, being USD for eToro and USD for DEGIRO.
As for portfolio allocation, this portfolio is quite fairly balanced, and I have kept the dynamic risk allocation from nominal bonds to inflation-linked bonds through 2022. Normally, mot of my bond allocation would be in nominal long-term bonds, but for most of the year, this has been about 50/50. However, I have in January started to tilt this back as it appears inflation is slowing and interest rate risk is no longer as imminent as before.
Over the last 12 months, this All Seasons Portfolio is about at par with the stock market but with lower volatility. However, a drawdown is never amusing, and a lower volatility drawdown is hardly a consolation. December gave me a drawdown of about 5% also in this portfolio, unfortunately, lagging stocks.
Here follows a chart of how each asset class performed over the month. Treasury bonds have been the worst performing asset class, closely followed by crypto and VIX. The only positive contributor this month was gold (measured in EUR), but it could hardly bring the whole portfolio to black figures.
Zooming out to a 3-month chart of each ETF, here the portfolio is slightly positive on this horizon, with stocks and bonds being the best performers, while commodities, VIX and Bitcoin have been consistently down.
Lastly, as usual, here is the table of my ETFs and the changes laid out in table form.
| ETF | Name | Asset Class | 2022-11-30 | 2022-12-31 | Change (Hold) | Change (ETF) |
|---|---|---|---|---|---|---|
| UIMB | UBS LFS Bloomberg TIPS 10+ UCI ETF(USD)Ad | TIPS | €790.74 | €759.00 | -4.01% | -4.01% |
| FRC4 | UBS LFS-Blmbrg Eur InflLnk10+ UCIT ETF(EUR)Ad | TIPS | €575.98 | €537.23 | -6.73% | -6.73% |
| DTLE | iShares $ Treasury Bond 20+yr UCITS ETF EUR H D | LT Treasury Bonds | €570.96 | €552.24 | -3.28% | -3.28% |
| DBXG | Xtrackers II Eurozone Gov Bond 25+ UCITS ETF 1C | LT Treasury Bonds | €597.16 | €524.36 | -12.19% | -12.19% |
| 3TYL | Wisdomtree Us Treasuries 10Y 3X Daily Le | LT Treasury Bonds | €241.62 | €453.60 | 87.73% | -6.13% |
| M9SA | Market Access Rogers Int Com Index UCITS ETF | Commodities | €472.64 | €456.00 | -3.52% | -3.52% |
| 4GLD | Xetra-Gold | Gold | €488.14 | €488.39 | 0.05% | 0.05% |
| JPGL | JPM Global Equity Multi-Factor UCITS ETF - USD acc | Stocks | €2,069.93 | €1,757.79 | -15.08% | -3.76% |
| VOOL | Lyxor S&P 500 VIX Futures Enhcd Roll UCITS ETF A | VIX | €142.08 | €131.52 | -7.43% | -7.43% |
| Currency:BTCUSD | Bitcoin XBT | Crypto | €79.60 | €77.39 | -2.78% | -2.78% |
| Cash Position | €0.00 | €0.00 | ||||
| Total | €6,028.85 | €5,737.52 | -4.83% |
Thank you yet again for following my blog about risk parity investing and the All Seasons Portfolio. If you haven’t done so already, make sure to subscribe to the newsletter via the form in the page footer, and to drop any comments you may have on the content with the comment section below or via email to nicholas@allseasonsportfolio.eu. The greatest value I have received from upkeeping this blog is the fantastic conversations with great people, such as yourselves, about ideas on investing and strategies. Thanks for that!
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We’ll catch up soon for the next update!
Nicholas Ahonen
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