Tactical Asset Allocation – March 2022

Tactical Adaptive Strategies Update

Performance

Adaptive Global finished with a gain of 2.29% for the month and gain of 2.09% for the quarter and YTD. The strategy spent the month invested in commodities and cash. Adaptive Global is our most broadly diversified “go anywhere” strategy with a 22+ year CAGR of 14.8%, a very modest maximum drawdown of 7.7%, and a low 9.4% standard deviation of monthly returns.

Adaptive Income finished unchanged for the month and shows a loss of 0.98% YTD. It spent the month in cash. With a 22+ year CAGR of 9.6%, this strategy captures nearly $6+ dollars of gain for every $1 in loss. It 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 months and shows a loss of 2.76% YTD. It spent the month in cash. This is a niche strategy intended to be used for a very small portion of a diversified portfolio. It sports a 6 year CAGR of 19.7%, maximum drawdown of 20.3%, and standard deviation of 17.1%.

The S&P 500 finished with a gain of 3.76% for the month and a loss of for the quarter and 4.62% YTD. It has a 22+ year CAGR of 7.1%, maximum drawdown of 50.8%, and standard deviation of 15.0%.

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

 

Perspective

Our Tactical Model provides trend direction and confidence levels for each of the 30+ asset classes and subclasses incorporated across the three strategies. Just three are positive of which one resides in the Balanced condition basket (our current Market Condition) and two live in the Hostile condition basket.

Bloomberg (March 23rd). Global bond markets have suffered unprecedented losses since peaking last year, as central banks including the Federal Reserve look to tighten policy to combat surging inflation.

The Bloomberg Global Aggregate Index, a benchmark for government and corporate debt total returns, has fallen 11% from a high in January 2021. That’s the biggest decline from a peak in data stretching back to 1990, surpassing a 10.8% drawdown during the financial crisis in 2008. It equates to a drop in the index market value of about $2.6 trillion, worse than about $2 trillion in 2008.

Adaptive Income posted a loss of  0.98% for January through March.

And how did Adaptive Income perform during the financial crisis in 2008? Adaptive Income recorded a positive CAGR of 6.15% with a maximum drawdown of 2.3% during the period October 2007 through March 2008.

“Sometimes there’s times to make money…sometimes there’s times not to lose money.” — David Tepper, founder of Appaloosa Management

I think that quote pretty well fits the positioning of the TAAStrategies during the past couple of months with historically high levels of cash. I expect there will be fresh opportunities soon enough.

 

From the April 1st Market Monitor

The big cap indexes which were little changed for the week are bullish and rising in the intermediate term and neutral and overbought in the short term suggesting higher prices following consolidation.

The big moves were in the Banking (-6.7%), Broker Dealer (-2.2%), and Housing (-1.5%) Indexes all of which are economic canaries showing signs of stress and falling momentum.

Cumulative Advancing Declining Volume was little changed for the week. With the S&P 500 having recovered 70%+- of its decline, it is hard to get excited with a slightly negative bias.

The Credit Markets Index got a boost this week from global declining spreads; although the yield trend remains bearish both domestically and globally.

The 10 year treasury yield was extremely overbought and pulled back a bit this week. My sense is that there is a good probability a high will be made between 2.8% and 3.0%. While the 2-10 Yield Curve has flattened, the flattening is due to the rise of 2 year yields, not the decline of 10 year yields.

The current watch list :

  • The Speculation Index is rising modestly in a slight shift to risk on
  • The Russell 2000 remains below resistance from where it broke down from an 11 month consolidation
  • Of the seven mega-cap leaders, one has turned up, several others are trying but they are not leading the market.
  • Value (risk off) continues to lead growth however growth did get a bid this week
  • Consumer Staples is vastly better bid than Discretionary which is risk off
  • Investor inflation expectations are extremely high but starting to reverse
  • Overall market breadth is giving up early signs of improvement
  • The VIX levels in the S&P 500, Russell 2000, and NASDAQ 100 are confirming the rally.
  • The MOVE Index, a measure of volatility in the Treasury market, is retreating from extreme levels but remains high enough to indicate liquidity issues remain

Three weeks ago I suggested that “The equity market may have bottomed given the slowing of downside momentum coupled with improving breadth.” I also suggested that downside risk remained high due to deteriorating conditions in the credit markets. While credit conditions show some improvement, they remain negative.

The S&P big and mid cap indexes have erased their downside targets in favor of new upside targets. The S&P 500 now targets 4718 and 4884. The current structure of the equity market suggests that the S&P 500 and NASDAQ 100 indexes may reach new highs while the remainder of the market lags. This is likely to signal the point where high inflation, rising rates, and rising energy costs create a noticeable drag on the 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)