Tactical Asset Allocation – May 2022

Tactical Adaptive Strategies Update

Performance

Adaptive Global finished with a loss of 0.48% for the month and gain of 3.03% YTD. The strategy spent the month invested in big cap value and precious metals. 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 9.3% standard deviation of monthly returns.

Adaptive Income finished unchanged for the month and shows a loss of 0.98% YTD. It spent another month in cash avoiding the continued carnage in fixed income. With a 22+ year CAGR of 9.5%, 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 spent another month in cash. This is a niche strategy intended to be used for a very small portion of a diversified portfolio. Adaptive Income sports a 6 year CAGR of 19.1%, maximum drawdown of 20.3%, and standard deviation of 16.9%.

The S&P 500 finished with a gain of 0.23% for the month and a loss of 12.79% YTD. It has a 22+ year CAGR of 6.7%, maximum drawdown of 50.8%, and standard deviation of 15.1%.

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

Perspective

Market Conditions

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.

Adaptive Income Is Back In The Market

The fixed income market is suffering through one of its worst periods in history. The real trouble started in August 2021 with all forms of fixed income from Treasuries to High Yield, each one of which shows a negative Compound Annual Growth Rate and significant drawdown. The drawdowns spared none of them:

  • Long dated Treasuries suffered a drawdown of 20.8%
  • High Yield Muni suffered a drawdown of 11.7%
  • Broad High Yield suffered a drawdown of 10.7%
  • Vanguard Bond Market Index Fund suffered a drawdown of 10.7%
  • Investment grade bonds suffered a drawdown of 10.5%
  • Mortgage Backed Bonds suffered a drawdown of 9.2%
  • Very Short Term Treasuries suffered a drawdown of 3.7%
  • Senior Bank Loans suffered a drawdown of 3.1%

Adaptive Income has spent four of the past ten months in cash while suffering a drawdown of just 1.8%. As much as it pains me to tell subscribers that Adaptive Income is in cash; cash is an investment which has provided a far better return than the alternatives.

This month, Adaptive Income is venturing back into a full allocation.

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 May 27th Market Monitor

Last week I wrote: “The equity indexes appear poised for a sharp (possibly multi-week) rally from oversold conditions; however the absence of improvement in the credit markets suggests that the decline will resume.

This week’s rally ranged from 6.5% in most major indexes to 9.2% in the Banking index. Truly a spectacular rally. The intermediate trend remains bearish and oversold while the short term trend is bearish and overbought suggesting a pause in the rally.

The Weekly ValueLine Model moved to Buy on Friday’s close. These signals are generally good for a couple of weeks or longer.

Cumulative Advancing Declining Volume shows strong intermediate term bullish divergences leading prices higher. The S&P 1500 Composite has seen exceptionally strong advance/decline volume ratios for 4 of the past 5 days. This suggests there is enough gas in the tank to move the indexes higher.

The Credit Markets Index remains deeply negative; however it recovered slightly this week as the rise in yields and credit spreads eased. The pressure on the equity indexes is coming from the credit market where conditions need to ease considerably to support a longer term rally.

The 10 year Treasury retreated slightly this week and will likely find strong support between 2.50% - 2.75% before resuming its ascent which targets 3.22%-3.33%.

We have likely seen half or more of this rally which may run to 4260-4320. Once the rally reaches a point of exhaustion, we will either get a correction (higher low) followed by another rally attempt -or- push to new lows. I continue to expect the S&P 500 to drop into the 3791-3760 target zone before we see a possible bottom.

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)