Tactical Asset Allocation – December 2017

Tactical Asset Allocation Strategy Update

Performance

Global Core is up 0.89% for December and up 12.71% for the year 2017.

Emerging Market equities and Precious Metals led the percentage gainers for the month. Big cap domestic was the major dollar contributor. Small caps and Treasuries were flat.

Outlook and Strategy

The TAAS Global Conservative Strategy lagged its benchmark Vanguard Balanced Index Fund this year by 1.24%. It has done so for two other calendar years during this full market cycle: 2015 by 2.60% and 2012 by 2.36%. It has out-performed for the remaining 7 calendar years: 2016 by 2.15%, 2014 by 1.21%, 2013 by 12.47%, 2011 by 10.32%, 2010 by 13.74%, 2009 by 3.5%, and 2008 by 28.09%.

It is abundently clear that we are in very late stages of this bull market and it is not uncommon for tactical stratgies to lag a bit in late bull markets. However this is more than compensated for by reduced bear market drawdowns and early bull market out-performance. For the full market cycle to-date, the Global Conservative Strategy has provided a CAGR of 13.37% with a 5.86% Maximum Monthly Drawdown versus the benchmark of just 6.94% with a 32.57% Maximum Monthly Drawdown.

My market "crystal ball" is no better than you will find elsewhere so I have no idea of when "the top" will arrive. The extreme historical valuation suggests that it could arrive tomorrow. Momentum is extreme and overdue for a pullback but remains bullish. Credit conditions suggest "not yet". 

I think it's quite likely we see a minimum 5%-10% pullback during the first quarter of 2018. From there we could see a rally which fails ("the top") or we could see a run to SPX 3000+-. That's probably about as high as this bull market runs.

Global Core is perfectly capable of switching from Equities to Fixed Income (cash and/or Investment Grade Bonds and Treasuries) on a timely basis; however it is not going to "nail" the exact top in Equities.

Revision to Satellite (Hostile) basket

Continued research and testing with the Satellite (Hostile) basket has led to my decision to sacrifice some return in the interest of reducing volatility and drawdowns. I believe this is a prudent trade-off for a time when investors are already under stress in Corrections and Bear Markets. Satellite (Hostile) [email protected] Risk, which measures returns for the period during which the basket is invested, drops from 13.84% to 10.68%. Maximum Monthly Drawdown drops from 8.0% to 3.5%.

Daily and Weekly Website Updates

The Proforma "Portfolio" page is updated in near real-time with daily and month-to-date performance. I generally get dividends posted within a day or two of x-date. This page now includes the date of the next Rebalance Notice as well as the next Rebalance Date.

The "Market Monitor" page is updated each weekend. It provides an updated assessment on the health of the equity market as well as interest rates, commodities, and precious metals.

Earl Adamy

Tactical Asset Allocation Strategy Performance

Global Strategy (Conservative)

Month: 0.89% gain
Year-to-date: 12.71% gain
Full cycle-to-date (Sep 2007): 13.37% CAGR, 7.14% Max Monthly Drawdown

Global Strategy (Aggressive)

Month: 0.89% gain
Year-to-date: 12.71% gain
Full cycle-to-date (Sep 2007): 16.24% CAGR, 8.22% Max Monthly Drawdown

 

Tactical Asset Allocation Fund Basket Performance

Global Core

Month-to-date: 0.89% gain
Year-to-date: 12.71% gain
Full cycle-to-date (Sep 2007): 10.46% CAGR, 6.54% Max Monthly Drawdown

Global Satellite (includes Favorable & Hostile)

Month-to-date: hibernating since Jul 2016
Year-to-date: hibernating since Jul 2016
Full cycle-to-date (Sep 2007): 20.52% [email protected]*, 8.21% Max Monthly Drawdown

*CAGR for the Favorable and Hostile Market Conditions during which Global Satellite was invested

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Compares performance of the Tactical Adaptive Strategies to the S&P 500 and Vanguard Balanced Index Fund

Supporting tables for Tactical Adaptive Global. S&P 500 (SPY) and Vanguard Balanced Index Fund (VBINX) can be found below

Our backtest results tables are constructed for two full market cycles beginning in January 2000.

The most recent market cycle covers October 2007 to date. The fund baskets for our tactical strategies are constructed from indexed Exchange Traded Funds (ETFs) with just two exceptions, an Open End Fund and a Closed End Fund, both with long history.

The earlier market cycle covers January 2000 through September 2007. A number of the ETFs we use were not created until later in the decade. For those cases, we infill using predecessor Open End Funds (OEFs) for which the indexing and/or subclass is substantially similar to the ETF. Aside from providing insight into possible strategy performance during a second, earlier, cycle, they also offer the advantage of completely out of sample data. The fact that the metrics of both cycles are very comparable appears to validate the process.

We have been asked if it is possible to extend backtests to earlier decades. While this appears to be a common practice with some services; it is not possible to produce credible results for many strategies due to the lack of funds with substantially similar indexing and/or subclass. Doing so would force me to stretch the term "substantial" far beyond my comfort level.

A Caveat

A 35+ year secular bull market in both equities and bonds began in 1982. The last cyclical bull market in equities (and to a lesser extent, bonds) began 10 years ago. Returns during these periods have been historically exceptional. Market returns for the next 10 years are highly unlikely to approach those of the past 10. In fact, there is at least some evidence that market returns have a high probability of being significantly lower and that bonds and equities (which have risen together) may actually begin working at cross purposes.

Investors should not use the statistics shown for our strategies to establish expectations of specific levels of returns or drawdowns. Investors should, however, appreciate that we believe the principles which underlie the Tactical Adaptive Global, Tactical Adaptive Income, and Tactical Adaptive Innovation Strategies are enduring enough to significantly outperform the market in the future, both in lowering risk and in improving returns.

Benchmark S&P 500 (SPY)

Benchmark Vanguard Balanced Index Fund (VBINX)

Compares performance of the Tactical Adaptive Strategies to the S&P 500 and Vanguard Balanced Index Fund

Supporting tables for Tactical Adaptive Income, S&P 500 (SPY) and Vanguard Balanced Index Fund (VBINX) can be found below

Our backtest results tables are constructed for two full market cycles beginning in January 2000.

The most recent market cycle covers October 2007 to date. The fund baskets for our tactical strategies are constructed from indexed Exchange Traded Funds (ETFs) with just two exceptions, an Open End Fund and a Closed End Fund, both with long history.

The earlier market cycle covers January 2000 through September 2007. A number of the ETFs we use were not created until later in the decade. For those cases, we infill using predecessor Open End Funds (OEFs) for which the indexing and/or subclass is substantially similar to the ETF. Aside from providing insight into possible strategy performance during a second, earlier, cycle, they also offer the advantage of completely out of sample data. The fact that the metrics of both cycles are very comparable appears to validate the process.

We have been asked if it is possible to extend backtests to earlier decades. While this appears to be a common practice with some services; it is not possible to produce credible results for many strategies due to the lack of funds with substantially similar indexing and/or subclass. Doing so would force me to stretch the term "substantial" far beyond my comfort level.

A Caveat

A 35+ year secular bull market in both equities and bonds began in 1982. The last cyclical bull market in equities (and to a lesser extent, bonds) began 10 years ago. Returns during these periods have been historically exceptional. Market returns for the next 10 years are highly unlikely to approach those of the past 10. In fact, there is at least some evidence that market returns have a high probability of being significantly lower and that bonds and equities (which have risen together) may actually begin working at cross purposes.

Investors should not use the statistics shown for our strategies to establish expectations of specific levels of returns or drawdowns. Investors should, however, appreciate that we believe the principles which underlie the Tactical Adaptive Global, Tactical Adaptive Income, and Tactical Adaptive Innovation Strategies are enduring enough to significantly outperform the market in the future, both in lowering risk and in improving returns.

Benchmark S&P 500 (SPY)

Benchmark Vanguard Balanced Index Fund (VBINX)

Compares performance of the Tactical Adaptive Strategies to the S&P 500 and Vanguard Balanced Index Fund

Supporting tables for Tactical Adaptive Innovation, S&P 500 (SPY) and Vanguard Balanced Index Fund (VBINX) can be found below

The Innovation ETFs used in the Innovation Strategy were not established until 2014-2015 so our history is limited. There are no predecessor funds which are similar enough to use for infill.

A Caveat

A 35+ year secular bull market in both equities and bonds began in 1982. The last cyclical bull market in equities (and to a lesser extent, bonds) began 10 years ago. Returns during these periods have been historically exceptional. Market returns for the next 10 years are highly unlikely to approach those of the past 10. In fact, there is at least some evidence that market returns have a high probability of being significantly lower and that bonds and equities (which have risen together) may actually begin working at cross purposes.

Investors should not use the statistics shown for our strategies to establish expectations of specific levels of returns or drawdowns. Investors should, however, appreciate that we believe the principles which underlie the Tactical Adaptive Global, Tactical Adaptive Income, and Tactical Adaptive Innovation Strategies are enduring enough to significantly outperform the market in the future, both in lowering risk and in improving returns.

Benchmark S&P 500 (SPY)

Benchmark Vanguard Balanced Index Fund (VBINX)