Tactical Asset Allocation – December 2018

Tactical Asset Allocation Strategy Update


Global Adaptive advanced 0.05% for December and finished 2018 with a gain of 0.29%. Our positions in TBills and cash were the perfect antidote to a wild and woolly December in which US equities joined the Rest Of The World in a bear market.

This is the comment which accompanied the allocations at the end of November: "Our allocations for December show all domestic and international equity, fixed income, and commodity funds available to the Tactical Model under duress. The Tactical Model settled for high confidence in Treasury Bills and cash. This is only the fourth time since September of 2007 and the fourth time since December of 2016 that the model has selected Treasury Bills for an allocation."

Year-end Wrap

This is the month by month performance of the Global Adaptive Strategy for 2018 and for the full market cycle since September 2007. While the Global Adaptive Strategy hit no home runs this year, it protected capital. One of the critical aspects of improving investment returns is to avoid digging deep holes which must be filled before portfolio growth can resume.

Adaptive Income

I created the Adaptive Income Strategy based on ideas I had following the release of Global Adaptive. The strategy is not one I talk much about because it's returns pale in comparison to the Global Adaptive Strategy. However, it does quite well for a fixed income strategy. Aside from producing dividends, it informs us regarding current investor appetitite for risk.

The Strategy is extremely simple. The basket consists of just 3 fixed income ETF's: HYG (high yield), IEI (short duration Treasury), and AGG (mid-duration investment grade corporate). It uses our Adaptive Dynamic Momentum algorithm to select just 1 of the 3 or cash each month.

An investor using the Adaptive Income Strategy who started with $100,000 could have withdrawn 0.3917% monthly and ended up with a residual balance of $134,050. 0.3917% equates to the indicated 4.7% annual indicated "Sustainable Withdrawal Rate".

A page for Adaptive Income Strategy has been added to the Subscriber area.


Wow! Talk about lumps of coal for Christmas; equity investors got a whole rail car. Fortunately, we were not among them.

We are in the early innings of a fresh bear market made official by the 20% decline in the S&P 500. Expect many months of volatility and sharp rallies which suck in and then spit out the die hard bulls. The only cure for a bear market is more price declines and more time in any combination.

As noted in this weekend's Market Monitor: "While the market has many concerns, it is the credit markets which deserve the most attention. Equity bear markets start in the credit markets with the puncturing of over leveraged debt."

Our goal is to preserve capital now and participate strongly in the next bull market when it arrives.

Outlook and Strategy

You may have tired of reading this; however the first four sentences finally proved prescient: "My general outlook is that Treasury rates will rise gradually until the markets blink. We'll know that the markets are blinking because the credit spreads will tell us. The Fed will blink afterward. A crash will see a flight to safety in Treasuries (lower yields again) while corporate and high yield go their own ways. Once the markets stabilize, Treasury rates are going to start rising again as debt, currency, and inflation issues take center stage." [Note that inflation issues, if they arise, will likely be related to increased import costs rather than labor costs.]

We'll see how the final sentence works out, but it still comports with my current view as does the second paragraph which follows:

"Rising rates always cause dislocation in the credit markets as interest costs rise, profits decline, and the least credit worthy borrowers delay and default. With a historically high 75%+ of new loans being written with "lite" covenants and 45% of Investment Grade bonds carrying the lowest possible IG rating, the next credit contraction is certain to be painful."


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.

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