Monthly Outlook: November 2016

Markets are on hold for the next week waiting upon the election results. But what happens the day after? Either Clinton or Trump will be President and half of the country will be angry and in denial. Regardless of your politics, how can that be constructive for growth, jobs, stability, and yes…investments? We’re all so focused on who will win and how the big showdown will be resolved. Maybe we’re missing the point – the real work and struggle likely begins 11/9 (the day after the election). That’s a scary Halloween thought.

October brought a few key changes to markets. Bonds finally had a slightly losing month, slipping nearly 1% (‐0.94%). The 10‐year interest rate popped up from 1.61% to 1.83%, nearly 1⁄4%, in anticipation of a much telegraphed Federal Reserve 1⁄4% rate hike coming in either November or December. Higher rates are good for the U.S. Dollar, and it moved 3.1% higher vs. a basket of foreign currencies. As a result, you may have noticed we swapped our international bond holding from an unhedged to a dollar‐hedged ETF. Overall, our bond portfolios are positioned with a weighted average maturity of about 4.5 years, slightly more defensive than the benchmark, given the rising rates.

Stocks, too, slipped a bit in October, and some markets (U.K. & Ireland, U.S. Healthcare) fell below their long‐ term moving‐average trendline, triggering sell signals for us. U.S. stocks fell 1.73% in October and Int’l stocks dropped 2.23%. The rising U.S. dollar hurt commodities, with gold dipping 2.92% and diversified commodities slipping 0.29%.

Very Close to Tipping

Our iFolios strategy starts with building portfolios of low‐cost index ETFs. We then determine an allocation range with a min/max % for each holding. When that index ETF is above its long term trendline, we’ll be at the maximum allocation to fully capture the growth. Conversely, when any index ETF is below its long term trendline, a sell signal is triggered and we’ll be at the minimum allocation to provide protection from loss.

Today, many markets are still barely above their long term trendline, but they’re teetering and very close to “tipping” over to a sell signal. How close? Well, the S&P500 is just 2.3% away from a sell signal. And European stocks? They’re just 0.4% away from being sold. Given the sky‐high valuations of stocks, and the uncertainty and risk associated with 11/9, we think it’s prudent to already be a little under‐allocated to stocks and to keep our finger on the sell button in case more markets tip to sell. We shall see, soon enough.

The Money Goes Somewhere

What happens if the stock markets do actually tip and we have to sell for protection? Where do we go to make money then? We have lots of recent history to turn to for clues: 2008, 2001/2, 1998, 1994, and 1987. I hate to admit it, but I was “there” for all of them. Typically, money shifts to safer investments including bonds, utilities, dividend stocks, and sometimes commodities including gold. Additionally, a small allocation to inverse funds (they go up when markets go down) can add some good hedging opportunities. The point is, we’re ready and watching all markets to see where the money is going. Within the allocation range of your iFolios model, we’ll follow the money and invest accordingly. Especially in volatile times, the best bet is that an active allocation strategy like iFolios will be better than a buy & hold approach.

Thinking Longer Term

The key to lasting wealth is to manage it with a long term view. Of course we want to earn positive and steady returns every month, quarter, and year. But we all know markets swing from over‐valued to under‐ valued and back again. This actually creates great opportunities for us as we actively manage allocations. Though we take a long term view, we also know that the cardinal rule along the way is to never lose big! If 2017 turns out to be a losing year for stocks, for example, we’ll do our best to meaningfully reduce our exposure to stocks and not lose. That way we’ll have the cash available to buy low and make bigger gains in the next rally. But let’s not guess ‐ follow the trend!