Tactical Asset Allocation – June 2022

Tactical Adaptive Strategies Update

Adaptive Global finished with a loss of 2.79% for the month and gain of 0.15% YTD. The strategy spent the month invested in big cap value. Adaptive Global is our most broadly diversified “go anywhere” strategy with a 22+ year CAGR of 14.6%, a modest maximum drawdown of 7.7%, and a low 9.4% standard deviation of monthly returns.

Adaptive Income finished with a loss of 1.14% for the month and shows a loss of 2.10% YTD. It spent the months in a blend of mortgage backed bonds and short term Treasuries. With a 22+ year CAGR of 9.4%, this strategy captures nearly $6+ dollars of gain for every $1 in loss. Adaptive Income sports our lowest maximum drawdown of 3.9% and our lowest volatility with a standard deviation of just 4.3%.

Adaptive Innovation finished unchanged for the month and shows a loss of 2.76% YTD. It has spent the past four months in cash. This is a niche strategy intended to be used for a very small portion of a diversified portfolio. Adaptive Innovation sports a 6 year CAGR of 18.9%, maximum drawdown of 20.3%, and standard deviation of 16.8%.

The S&P 500 finished with a loss of 8.25% for the month and a loss of 19.98% YTD. It has a 22+ year CAGR of 6.2%, maximum drawdown of 50.8%, and standard deviation of 15.2%.

See the strategy descriptions, charts, and tables below or on the Strategies page.

Market

The good news in Adaptive Global was that our allocation to value stocks was limited to 25% while the other 75% sat in cash.

I can’t say that I’m thrilled that the Adaptive Income Strategy jumped back into the market for June. The month of May saw a nice clean, low volatility rally in mortgage backed securities just ahead of a sharp dive in June which only partially recovered. Fortunately, the volatility limits split the allocation between mortgages and short term Treasuries keeping the loss manageable.

The good news is that we have missed the worst first half year start in the S&P 500 since 1970 and the worst decline in the bond market since 1842 (not a typo 1-8-4-2). Adaptive Global remains up 0.2% while the S&P 500 is down 20.0% and Adaptive Income is down 2.8% while the Vanguard Total Bond Market Index Fund (Investment Grade) is down 10.6%.

Personal Allocation

A subscriber asked how I decide upon the Personal Allocations which I include in each month’s letter. My answer may be of interest to other subscribers.

My personal allocations are based on my personal perception of risks and are used entirely for risk management.

  • Given an early/mid cycle equity bull market, I favor allocations to Adaptive Global and Adaptive Innovation (10%-20%) for the high returns. I will note however, that Adaptive Income produces some of its highest returns during early/mid cycle equity bull markets by investing in beaten down high yield.
  • During a late cycle equity bull, when the equity market is at valuation extremes, I favor a mix of Adaptive Global, Adaptive Income, and a minimal or no allocation to Adaptive Innovation.
  • When the Tactical Models are heavily favoring cash, I tend to select either Adaptive Global or Adaptive Income based on the highest non-cash market exposure.

As you are likely observing, each of the strategies are entirely capable of managing risks/volatility independently but I do what I'm comfortable with.

Performance According To Market Condition

The comparative table which appeared in the most recent Featured Article on the blog has been updated to reflect the shift from bull market to bear market triggered in mid-June. In addition to the blog article, it appears in the third pane on the home page.

Market Condition

The Market Conditions Model which shifted to Hostile for the month of May, remains Hostile. Our whitepaper “What Is A Market Conditions Model? How Does It Lower Risk?” provides a succinct summary of what this means for investors.

Market

Note: Market Monitor is a structured weekly process of compiling and analyzing critical information about the health of the markets. I've been doing this for nearly four decades. These are personal observations which have no effect on the TAAStrategies.

From the July 1st Market Monitor

All major indexes declined for the week except Housing. The NASDAQ 100 and S&P 100 led the declines. All indexes remain bearish with bullish divergence in the intermediate term and bearish and rising in the short term.  As I wrote last week: “This combination suggests a strong rally (possibly multi-week) followed by a retest of the lows and possible move lower.”

Worth noting, the Shanghai Index continues to exhibit strength although overbought on both the intermediate and short term. Also worth noting, Inflation expectations are falling sharply.

There are strong bullish divergences in the VIX indexes.

Cumulative Advancing Declining Volume exhibits short term weakness and intermediate term bullish divergences to price.

The Credit Markets Index weakened again this week with both yields and spreads moving higher globally. The BOA MOVE Index closed on a fresh high this week pointing to deteriorating liquidity in the Treasury market.

The 10 year Treasury yield pulled back again this week. While the technicals continue to point to a probable target of 3.94%; a weekly close below 2.74% would shift the odds to a switch in direction.

Conditions continue to favor a multi-week move higher followed by a lower low. Conditions in the credit markets indicate a high level of stress which significantly increases risk to both credit and equity markets.

Thank you for reading.

Earl Adamy

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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 results tables are constructed for three full market cycles beginning in January 2000.

The Adaptive Global table shows backtested results through July 2018 followed by actual results. More information is available in the blog article: The TAAStrategies, A Short History.

The most recent market cycle covers January 2020 to date.

The second market cycle covers October 2007 through December 2019. The Adaptive Global and Adaptive Income strategies were developed using the first 10+- years of data from this cycle while the final years are actual.

The third market cycle covers January 2000 through September 2007. This market cycle was used to provide out of sample validation of strategy results from the second market cycle. The fact that the return and risk metrics for the third cycle are statistically comparable to those for the second cycle validates the process.

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. A number of the ETFs we use were not created until 2007+. In each case, we infill using predecessor Open End Funds (OEFs) for which the indexing and/or subclass is substantially similar to the ETF.

We have been asked if it is possible to extend backtests to the 1970’s. While a few publishers attempt this; we believe it is not possible to produce credible results for all but the most basic TAA strategies due to the lack of funds with substantially similar indexing and/or classification. Doing so would force me to stretch the term "substantial" far beyond my comfort level.

A blank month indicates that the strategy was in cash.

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 results tables are constructed for three full market cycles beginning in January 2000.

The Adaptive Income table shows backtested results through June 2019 followed by actual results. More information is available in the blog article: The TAAStrategies, A Short History.

The most recent market cycle covers January 2020 to date.

The second market cycle covers October 2007 through December 2019. The Adaptive Global and Adaptive Income strategies were developed using the first 10+- years of data from this cycle while the final years are actual.

The third market cycle covers January 2000 through September 2007. This market cycle was used to provide out of sample validation of strategy results from the second market cycle. The fact that the return and risk metrics for the third cycle are statistically comparable to those for the second cycle validates the process.

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. A number of the ETFs we use were not created until 2007+. In each case, we infill using predecessor Open End Funds (OEFs) for which the indexing and/or subclass is substantially similar to the ETF.

We have been asked if it is possible to extend backtests to the 1970’s. While a few publishers attempt this; we believe it is not possible to produce credible results for all but the most basic TAA strategies due to the lack of funds with substantially similar indexing and/or classification. Doing so would force me to stretch the term "substantial" far beyond my comfort level.

A blank month indicates that the strategy was in cash.

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.

The Adaptive Innovation table shows backtested results through June 2019 followed by actual results. More information is available in the blog article: The TAAStrategies, A Short History.

A blank month indicates that the strategy was in cash.

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)