This is a time to understand your timeline and cash flow needs which should now be prioritized. Before the Russian war with Ukraine broke out, there were manageable market risk concerns like the Fed rate decision and COVID numbers. However, this is a cycle with geopolitical tensions and government actions in which there will be opportunities and rewards if you have a solid asset allocation strategy in place.
SAMPLE of a Moderate Portfolio with active money managers' strategies:
- Assets can be allocated within the following percentage ranges:
- U.S. Equity: 25-65%
- Investment Grade Bonds & Money Market: 5-45%
- International Equity: 0-35%
- Non-Investment Grade Bonds: 0-35%
An asset allocation strategy may change within the stated ranges based on occurrences in the market. This is where having active managers with quality capital market research is important.
Cash is an asset class which under current market conditions should be considered because of rising rates and potential market downside.
You may notice below the picture of the Eiffel Tower. In the first image, the mirrored images of the Eiffel Tower represent the extreme rise of the S&P 500 (blue line) vs the extreme increase in investor debt (shown in red). If a rally creates a chart that looks like the top side of the tower, investors often end up experiencing the bottom side of the pattern as well. As the S&P 500 starts to revert to its mean investor debt will also likely start to revert to its mean. The result is that the two should eventually come closer together. This is known as a mean reversion which tries to capitalize on extreme changes in the pricing of a particular security or market, assuming that it will revert to its previous state. This is another reason why using quality, active money managers may be beneficial.
The three charts below are visuals that can be helpful in understanding the current market climate.
Trading based on the mean reversion theory tries to capitalize on abnormal changes in the pricing of a security, assuming it will revert to its previous state. Buying low and selling high is one way to apply the mean reversion theory. However, extreme changes in the pricing of a specific security could have other causes, such as unrealistic company earnings expectations, acts of war, COVID, supply chain issues, etc. Investor credit, AKA Debt, should be observed at an all time high, which has helped fuel the growth in the market, but which will most likely revert to the mean. Reversion to the mean is never guaranteed.
Notice the Eiffel Tower effect on both indexes below. In previous market corrections, the $SPX followed the China index mean reversions (green line). This shows we are global markets and are not immune to market effects in other countries.
There are some real issues in the bond market. Yields are rising quickly so bond portfolios need to be monitored.
Special note: This is interesting and not in the mainstream media. The chart below shows bank lending rates between banks (USA/Eurodollar). I was concerned that liquidity was being challenged until Thursday of last week when the Federal Reserve (the Fed) added a substantial amount of money into the system. This added money also increases inflation. See Inflation vs Deflation. The Fed did raise the interest funds rate from Zero (0) to a suggested .25% to .50% which is a very small increase with inflation at ~7% +/-.
This is a time to understand your timeline and cash flow needs which should now be prioritized. However, remember this is a cycle in which there will be opportunities and rewards if you have a solid asset allocation strategy in place.
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Data and rates used were indicative of market conditions as of the date shown. Opinions, estimates, forecasts, and statements of financial market trends are based on current market conditions and are subject to change without notice. References to specific securities, asset classes and financial markets are for illustrative purposes only and do not constitute a solicitation, offer, or recommendation to purchase or sell a security. Past performance is not a guarantee of future results.