Tactical Asset Allocation – March 2020

Tactical Adaptive Strategies Update


Adaptive Global declined 0.45% for March and 6.17% YTD. Adaptive Global would be positive for the month were it not for the large loss from the 8.7% allocation to Emerging Markets. I am going to re-evaluate the use of this ETF under Balanced market conditions.

Adaptive Income declined 0.53% for March and has gained 1.82% YTD. Our corporate bond ETF took a big hit from the lack of bond market liquidity even though 72% of its portfolio is invested in triple A rated corporate bonds. One of my mid-month emails pointed out that AGG, our sole position in Adaptive Income and largest position in Adaptive Global, was suffering extreme liquidity issues and recommended patience: “My view is that the bid/ask spread for AGG will tighten and NAV values will rise as the Treasury market calms down.” AGG recovered all but 0.53% of its loss.

Adaptive Innovation declined 4.93% for March and has gained 2.32% YTD. While Adaptive Innovation sold off hard during the decline, the innovation ETFs were well hedged with Treasuries and have recovered most of the loss.

SPY (S&P 500 ETF) declined 12.5% for March and 19.2% YTD

VBINX (Vanguard Balanced Index Fund) declined 8.5% for March and 11.6% YTD


COVID-19 is widely blamed for the avalanche of selling. I disagree.

The market crash became possible due to a mountain of excess. Excessive corporate debt used to fund stock buybacks. Excess in the issuance and rating of “covenant lite” bonds and loans. Excess in Federal spending and deficits. Excess in equity valuations to historically high extremes. And excessively cheap money intended to prevent the natural business cycle from cleansing the whole lot.

Absent this mountain of excesses, there could have been no avalanche. We are about to see if the unleashing of record deficit spending (aka Modern Monetary Theory) coupled with a ballooning Federal Reserve balance sheet and virtual nationalization of the credit markets can hold the wolf at bay.

In one way or another, we will get through this crisis. It’s not likely to be pretty and the odds of markets returning to the “way it was” are next to nil. As always, there will be opportunities. Among those opportunities, I see a surge in innovation driven by the challenges of the crisis and post-crisis periods coupled with a resurgence of local manufacturing.

Battle Testing

Strategic Asset Allocation (aka Buy and Hold) has a bad habit of losing large pieces of the portfolio in bear markets.Tactical Asset Allocation (TAA) was born in the roller coaster stock and bond market period from 1966 to 1982 which suffered a secular bear market in bonds, roaring inflation, and 6 cyclical bear markets in equities.

Our Adaptive Global and Adaptive Income strategies have clearly out-performed Strategic Asset Allocation during two full market cycles (2000 thru 2019); although lagging during the past two years. We knew the next bear market was coming, it was only a matter of when. It has been rewarding to see these two strategies significantly under-perform the bear during the past two months.

Adding a third bear market to our history will provide additional data which may highlight opportunity for improvement.

Adaptive Innovation, which has limited history, has now experienced its first real bear market. It too has under-performed the bear.

I will be doing a blog article reviewing and comparing the performance of these 3 strategies.


I am reading a lot of Cv19 material by highly respected medical and research people with links to supporting research. Here are a few insights which may prove useful:

  • Ignore the Covid-19 statistics from China. China's case count and deaths appear to be significantly understanded, perhaps by a factor of 10.
  • China will have a faster economic recovery than the West. China’s vast surveillance system has been quickly adapted to identify and forcibly isolate those who have Covid-19. This is simply not possible in a free society.
  • The US will likely face the worst of Covid-19 between mid-April and early May. The economic impact, especially among small businesses, will be deep and lasting. Many small business owners will lose their businesses and their replacements will not step in quickly. Major companies with deep pockets will pick up market share.
  • What will it take to begin a return to normal? Public confidence. What will it take to begin restoring public confidence? 1) Widespread availability of testing for anyone who wants it which will require an increase in testing capacity from the current 100,000 per day to at least 1,000,000 per day. 2) an effective treatment for the majority of those who contract Covid-19. How long will that take? My optimistic estimate is by the end of May.

In short, the social and economic impacts of Cv19 will be significant but at this point are unknowable. However the country and world will manage to get through it.


From the March 27th Market Monitor

This week, the S&P 500 completed a 35.4% decline high to low in just over 5 weeks. That is the sharpest and fasted equity market decline in history. Not satisfied with that record, the market set a post-1929 record for rally speed during the 3 days which followed. All major indexes ended up this week: S&P big cap (500) up 10.3%, mid cap up 13.1% and small cap up 10.8%. The biggest gainer was Housing at 17.0%.

The huge bullish divergences noted last week in Cumulative Advancing Declining Volume provided lots of fuel for this week’s rally. However, Cumulative Advancing Declining Volume barely moved the needle upward as the rally progressed. All S&P indexes (composite, mega, big, medium, small) now show significant bearish divergences. That is confirmed by the S&P sector indexes which, with the exception of Industrials, all show bearish divergences.

Vix ended the week at 66, far from any semblance of normality and well above the levels where equities might be considered “safe”.

Credit spreads barely retreated this week leaving our Credit Market Index at -108%. The initial hit to the credit markets came from a sudden and pervasive lack of liquidity in all sectors from Treasuries to corporate to high yield to repos and commercial paper. The Fed has provided abundant liquidity which has settled things down somewhat. The next wave to hit the credit markets will be a longer process of default and major problems rolling over debt, especially high yield.

The Treasury market is trying to come to grips with a number of issues including flight to quality, unwinding of leveraged Treasury positions, foreign liquidations, and the prospect of huge deficits. I expect the Fed to cap rates should they begin a prolonged rise. TBills closed the week at a negative yield of 6 basis points (-0.06%)

There is also turmoil in the US$ as all those owing dollar denominated debt scramble to buy dollars followed by the sale of dollars at the prospect of the Fed running the printing press full bore.

The only “safe” fixed income is that which is guaranteed by the Federal government or supported directly by the Fed. That leaves Treasuries, Federally guaranteed mortgages and high quality investment grade bonds. There is likely to be a good deal of volatility in longer duration bonds. Those buying Treasury Bills are paying 6 basis points to the government for the privilege.

Equities are pushing up against overhead resistance. The rally in the S&P 500 (has so far) failed at the return to the bull market trendline (at 2570+-) from the 2009 bottom. The poor state of Cumulative Advancing Declining Volume suggests that the rally probably doesn’t have enough gas in the tank to push a great deal higher.

Looking at the monthly chart of the S&P 500, I have a minimum price target at 2064 and a typical price target at 1700 which is close enough to the breakout from the 2000 and 2007 highs to suggest a retest.

Earl Adamy