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Portfolio Update – May 2020 – What happens now? Uncertainty after Covid-19

Contents of today’s post

  • Summary of May 2020 in the economy – Stock market has bounced back!
  • Uncertainty is increasing – will we see deflation or inflation? Prepare for both
  • Monthly portfolio update: Fairly stable month: long-term bonds down, stocks and commodities up
  • Book tip: Hot Commodities by Jim Rogers
  • In case you missed it: Deep Dive post about how to hedge against inflation on my Patreon page

Ciao, and happy to have you back for another monthly update of my All Seasons Portfolio.

Hope you have stayed in good health. We are now finally beginning to see restrictions being lifted, and I sincerely hope the worst of this health crisis is behind us. This past week – the first week of June – has been the first few days I have been back to the office since the beginning of March. 12 weeks in the home office is a long time, but completely necessary. Sure, the pandemic is not over, so it is wise to still exercise caution, so I will only spend a few days per week in a quite empty office.

Even though the health crisis seems to have culminated (at least for now), it is hard to say where the financial markets are heading. I don’t know what you think, but in my opinion, we have been seeing quite many contradictory signals on what will be coming next.

In the end of May and beginning of June, the stock markets had returned to the same levels as when we began this year. Nasdaq Composite Index – the tech heavy stock exchange in the U.S. – is now trading at All Time High levels yet again and stands at 9,814 on 5 June 2020, which can be compared to the current ATH of 9,817 posted on 18 February 2020, just before the virus hit the financial markets. Note that it bottomed out on 6,860 on 19 March, so the moves have been massive in such a short time. That is scary just in itself, how volatile it can be. Hope you didn’t give up on stocks or investing when things looked the darkest.

So far, the stock market has really seen a V-shaped recovery. But what does the stock market see about the economy, that economists are missing?

If we look at any other indicator than the prices of stock, things are not really looking that good yet. And all these contradictory indicators makes it incredibly difficult to even try to forecast what will happen the next 6 months, 1 year and 3 years. Can we even try to predict where economic growth and inflation is heading?

Unemployment is still at record breaking levels across the globe. Still, while the May numbers for the American unemployment were actually not that bad, the storm is by far not over. Surprisingly, US employers added 2.5 million jobs in May 2020 in non-farm payrolls, way better than the expected decline of 7.5 million jobs. That is a delta of 10 million jobs, which further pushed stock markets upwards on 5 June when the numbers were released. But American unemployment rate is still a whooping 13.3% (expected for May was 19%). And while the European redundancies have been less dramatic than on the other side of the Atlantic Ocean, unemployment has risen to 7.3% in the Euro zone and 6.6% in EU-27. The difference between EU and US unemployment can much be explained by safety nets and social security systems in the EU, and broader employee protective legislation.

Central bank stimulus has been a big part in the stock market recovery, but which adds to the uncertainty going forward. As of mid-May, the cumulative G10 central bank Covid-19 stimulus package had surpassed USD 15 trillion, which is a staggering amount. Since then, the ECB has committed to another half a trillion euros, so this number is still counting upwards.

But will the expanded central bank balance sheets also mean increased inflation? Never before, not even during the 2009 financial crisis, has so big stimulus packages been announced. However, it is worth remembering that not all of the USD 15 trillion hits the financial system at the same time. Much of this is only commitments, i.e. money that is ready to be used if it is needed. And if it is not needed, it will just be cancelled, without having ever entered anyone’s wallets.

But depending on for how long the coronavirus outbreak lasts and how long businesses and individuals will need support, the greater the risk is for inflation.

Most likely we will be looking at a scenario of deflation in the short term as consumer spending is cut as a result of restrictions in travel and movement, followed by a period of higher inflation when spending starts again and the printed money can be used. This can be visualized by the below two graphs from the Federal Reserve Bank of St. Louis.

The first graph shows the M2 money stock, i.e. amount of cash and liquid assets available in the US. The second graph shows the velocity of the money in the system, i.e. how many fast each dollar on the market changes hands compared to US GDP. When both of these graphs are increasing, it is an indicator of inflation, as there is more money on the market and the money trades hands quicker.

Now, however, the velocity is slower, mainly caused by the difficulties in spending when people are in isolation. But when spending begins, and GDP shrinks, also the M2 velocity will increase again.

Read more about the M2 money stock at the Federal Reserve Bank of St. Louis’ website
Read more about the Velocity of M2 at the Federal Reserve Bank of St. Louis’ website

This means that we are now at a crucial time. Basically, the economic growth must kick off again quickly, otherwise we may enter into a time of stagflation. It is difficult for central banks to counter high inflation when economic growth is weak, as the main tool for curbing inflation is higher steering rates, which the weakening economy may not be able to deal with.

When uncertainty is high, how can you prepare? I for one, is going to stick with the All Seasons Portfolio strategy. At the time of writing, in the beginning of June, we are standing at a crossroads. Today, it is impossible to say if economic growth will be higher or lower in three month’s times, and it is extremely difficult to say if we will see deflation or inflation after the summer.

Instead of betting on any of these four scenarios, I am more convinced than ever that the All Seasons Portfolio Strategy is a wise choice in investments. At least now, I am prepared for which ever scenario will hit us next.

Illustration of the assets in the all seasons portfolio

Portfolio Update May 2020

With the All Seasons Portfolio, my holdings have been very stable throughout 2020, and I am still on par with the major stock indexes YTD, but with way less volatility. My risk adjusted return is thus much above that of the stock market indexes. I did add some more money into the stock part of the portfolio back in April (read more in my April monthly update) and have been able to enjoy the ride on the stock market.

Government Bonds have only the past few days lost a bit in value, although not as much as one would have expected. It has been another contradictory indicator that both stocks and government bonds have been going strong at the same time, as these assets typically have negative correlation. Basically, it has meant that the stock market believes that growth will pick up, while the lending side has not been equally convinced.

Moreover, the price of gold has been very stable for the past month, after a bull run this year when uncertainty has been high. The price is still hovering around 1,700 USD/oz, levels it reached a month ago. Maybe this is another indicator that markets are not convinced of whether the stock market and the economy recovery will last.

As for commodity prices, the broad basket of commodities reflected in the Bloomberg Commodity Index has recovered slightly after the great decline earlier this spring. Month-by-month, the index is up almost 5%, but is still trading down about -20% YTD.

As for my portfolio, gold is really beginning to take up a too big portion of the portfolio. The asset splits are almost as I want them otherwise, but it is clear that my exposure to TIPS is somewhat less than I would have liked. I am looking to have this corrected in the coming months when I can find a few spare euros laying around. I can at least pat my own back that stocks have bounced back toward its sought after 30% mark.

Looking at the development of the assets in the graph below, it is clear that long-term government bonds are beginning to decline, and stocks, gold, and commodities continuing their growth momentum. My TIPS and Mid-Term stocks have moved quite sideways.

Speaking of sideways, the same can be said of my whole portfolio in aggregate. No big drama there, with a slight decrease of about -0.87% month-by-month, mainly driven by a decrease in long-term government bonds.

The increase in portfolio value becomes even more evident with the next graph. As a reminder of what you see here, this graph shows the monthly development for each asset class, as compared to the average purchase price as at the end of each month. The thick black line with the values included, is the weighted development of the portfolio.

And finally, here is the usual summary of the ETFs that I have in my portfolio and the development against previous month. Here it becomes very evident that the decrease in my portfolio value is driven by long-term government bonds, while stocks and commodities have countered a fair share of that decline.

iShares Global Inflation Linked Govt Bond UCITS ETFTIPSIE00B3B8PX14€458.49€456.95-0.34%
Invesco US Treasury 3-7 Year UCITS ETFGovt Bond MidIE00BF2FNQ44€402.50€396.83-1.41%
iShares USD Treasury Bond 20+yr UCITS ETFGovt Bond LongIE00BSKRJZ44€1,156.00€1,099.32-4.90%
Invesco Bloomberg Commodity UCITS ETFCommoditiesIE00BD6FTQ80€305.98€309.821.25%
Xtrackers Physical Gold ETCGoldGB00B5840F36€453.90€455.100.26%
Vanguard FTSE All-World UCITS ETFEquityIE00B3RBWM25€1,177.92€1,202.402.08%

This concludes what I have been thinking about this past month. I have little clue of where we will be heading, but I am pleased to be prepared with the All Seasons Portfolio. Predictions are very difficult these days in the middle of a health crisis and where governments and central banks have heavy influence in what is going on in the financial markets.

Thank you once again for your attention. If you don’t subscribe to the newsletter, now is a good time to sign up, so that you always get a notification when I add a new post (no other spamming than that).

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I hope to see you here again next month, and feel free to join the discussion in the comment section below.

Until next time, and stay safe,

Book tip: Hot Commodities by Jim Rogers

While there are a great flora of books about investing on the stock market, there are very few good reads on how to invest in commodities.

As commodities plays an important part of the All Seasons Portfolio Strategy, and gives you exposure to seasons of high inflation and high growth, it is wise to learn a little bit about how commodity investing works. As trading commodities are built entirely by futures contracts instead of physical assets, this adds another level of complexity when compared to stock market investing.

The best book about commodities is, hands down, Hot Commodities, written by Jim Rogers, a successful commodity trader and co-founder of the Quantum Fund. In this book, Rogers shares great advice for commodity trading and detailed tips on how to invest in this huge global market place.

With this great book, you will better understand how to trade in commodities like crude oil, or soft commodities such as coffee, wheat or sugar. You will enhance your knowledge about how the 7.5% commodity portion of your All Seasons Portfolio adds value.

Check it out today on Amazon (affiliate link):

Buy it on

This Post Has 4 Comments

  1. Carlo

    Hallo Nicholas. I just want to ask you why you used tresuarys instead of European (or global) bond for the long and mid term bond part, while using global bond inflation linked and not TIPS. Also do I find all that Etf on Degiro? Thanks, bye

    1. Nicholas

      Hi Carlo,
      All my ETFs are found on Degiro. I don’t think that Degiro have different assortment depending on from which country you use their services.
      You have a valid point; to decrease the volatility as much as possible, one should not mix geographical exposure. I just recently switched my global bonds to US Treasuries, and haven’t yet done the same switch with my TIPS. Strongly considering changing that one in the near future. What geographical exposure do you have?
      Buona serata,

  2. Carlo

    I am exposed geographically to Europe because I live in Europe and use eur as currency. I am not saying this is the right thing to do anyway. I think the best geographical exposure is the one where you live or a global one. By investing only in USD bonds you are investing in a foreign currency adding volatility to the portfolio that you did not want when All Weather portfolio was chosen.

    1. Nicholas

      I totally understand your thinking here and I agree that it is a valid point. Your closest are Europeans and your relative wealth is more comparable to other Europeans than Americans. The same of course applies to me.
      I am yet to be 100% convinced however that it is the wisest choice to only be exposed to the European bonds and stock markets. The American one is still the dominant in the World and have at least until now been where Investors turn when there is a crisis (also now during the Covid-19 outbreak). However, it is not certain that this will always be the case – for example, China is challenging the United States to become the dominant power in finance.
      To avoid unnecessary volatility that is associated with investing in USD denominated stocks and bonds, we have two options: one, as you described, is to only invest in our own currency, and the other, being that we invest in the United States, but in EUR Hedged products. Perhaps with EUR Hhedged American investments, you get the superior development of American assets, but without the currency exposure.
      Still not sure which is the best approach – any thoughts are greatly welcomed!

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