Portfolio Update – August 2022

July is well behind us, and now that most of the rate hikes in the US up to about 3.75-4.00% are expected and priced in, the All Seasons Portfolio got a bit of a revenge this past month with some positive performance.

The US inflation rate for July was just published as 8.5%, down from 9.1% in June, and below market expectations of 8.7%. It could be that inflation has peaked, as theorised by several market commentators and macro traders, and that the main fear on a forward-looking basis is weak growth.

We check out a few extra charts this month to find more perspective on what the market believes about inflation going forward. If expectations are coming down, there would be more room for new surprises to the upside that are not priced in.

It is wise - as always - to remain agnostic.

Continue ReadingPortfolio Update – August 2022

Portfolio Update – July 2022

July is well behind us, and now that most of the rate hikes in the US up to about 3.75-4.00% are expected and priced in, the All Seasons Portfolio got a bit of a revenge this past month with some positive performance.

The US inflation rate for July was just published as 8.5%, down from 9.1% in June, and below market expectations of 8.7%. It could be that inflation has peaked, as theorised by several market commentators and macro traders, and that the main fear on a forward-looking basis is weak growth.

We check out a few extra charts this month to find more perspective on what the market believes about inflation going forward. If expectations are coming down, there would be more room for new surprises to the upside that are not priced in.

It is wise - as always - to remain agnostic.

Continue ReadingPortfolio Update – July 2022

Insights – Interest Rate Risk and Asset Correlations with Future Cash Rate Expectations

"Is the All Seasons Portfolio strategy not working anymore?"

With an annual drawdown for such portfolios almost as bad as for the stock market YTD (S&P 500 currently being down 16% since 1 January, having briefly been below -20%), I am not surprised that I have been hearing this question more and more recently. Is this a bug or a feature?

The first seven months of 2022 can be illustrated by two major themes in terms of financial markets: a) significant underperformance of major asset classes such as stocks and bonds, and b) rising rates.

The latter constitutes one of two undiversifiable risks for investors, as when the cah rate rises, that impacts asset prices as returns of risky assets always compete with the return of cash.

In this article, we explore interest rate risk and how most major asset classes have correlated with the future cash rate expectations over the first seven months of 2022. We try to answer the question on if the All Seasons Portfolio strategy is broken, or if the playing field has been reset and that we can expect better performance ahead.

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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.

Continue ReadingPortfolio Update – June 2022

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.

Continue ReadingPortfolio Update – May 2022

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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