Last week the US economy lost 20.5 million jobs in the month of April. We all knew it was going to be a big number, we all knew that it was likely to be in the twenties. In fact estimates were in the range of 21 – 22 million. The report was released on Friday morning and the market closed higher on the day. In fact, the rally since the March 23rd lows has been almost entirely in the face of dismal (draconian really) economic data. This has prompted many to assume (falsely in my view) that the market is disconnected from economic reality. This only appears to be the case if you look at a broad index (S&P 500) over a narrow period of time (March 23rd – Today). If that is your investing world view, then it is easy to see how you might come to that conclusion. For the record, this is not my view. My view is that the market has done exactly what it is meant to do. It has discounted the future and embarrassed a great number of market pundits and so-called experts.
Let’s start at the broad asset class level. Here is a grid of the assets that I consider when constructing my own portfolio. Sorting these ETFs by their 12-month return, we can see a theme. At the top of the list is Gold (safety, store of value), Long-Term Treasuries (safety, slowing growth), Precious Metals (safety, store of value) and Growth Equities (slowing global growth). Look at the bottom of the list: Small Caps, Value, Foreign Markets…in a word: Risk! These trends are not new, and they exist across timeframes.
Drilling down on the equity portion of the different asset classes, it is growth that takes center stage as QQQ and IWF are top two performing funds and the only two that are outperforming SHY, a proxy for cash.
The Invesco QQQ Trust (QQQ) has been the place to be in equities as large growth names continue to outperform. The fund has a Bullish rating and is above our long-term trend line.
Moving to the fixed income basket, long duration treasuries have been the best portfolio allocation for the past 12 months. Interestingly, they continue at the top of the list. The only area of fixed income in the US that is down over the past year is high yield. Long-term Zero Coupon Treasuries are the best game in town.
Interestingly, ZROZ is the number three ranked Treasury bond ETF in PortfolioWise. The Pimco 15+ Tips Index Fund (LTPZ) carries a Very Bullish Rating and has been leading the broader fixed income universe.
What about foreign equities? It seems that every year the case is made for allocation to equities outside the US. This thesis is usually centered on the valuation differential between US and non-US stocks. I understand the argument but I am also of the view that valuation is not a catalyst. Over the past 12 months only the iShares S&P Global 100 Index fund is positive and outperforming SHY. Back in April, I wrote about my aversion to having an allocation to equities outside the US at this time.
If tempted to have an allocation in foreign equities, at least IOO has a Very Bullish rating in our model.
The Alts bucket is where I like to focus on the opportunities in the commodities, real estate and in thematic areas that have caught my attention. One particular focus of late has been the role innovation will play in a post COVID-19 world. This has led me to areas such as bitcoin, blockchain and the funds from ARK Invest. However, the one true leader in this category has been the tried and true store of value which has stood the test of time…Gold. The VanEck Vectors Gold Miners ETF has a Very Bullish rating and has been outperforming the broader equity market.
It may seem easy to make the case that “the market” is disconnected from economic reality but that assumes that said market is only made up of 500 large US companies. In reality, the investment landscape is broad and I would argue that the “true” market, made up of different types of stocks as well as other assets classes, is painting the correct picture of what is happening in the global economy. Looking at current leadership trends in conjunction with an unbiased rating system is a step in the direction of being in tune with what is, not what we think should be.