March has turned in another month of stubborn market defiance as the investment world is waiting for a correction yet it never seems to come or fully develop! It’s without question that many of the warning signs continue to lurk below the surface but the S&P 500 has still managed to tack on about another +1%. Year to date we’re just about 1% of where we started 2014 but it sure feels uncomfortable for many.
If this is your first time reading about our MPG Core Tactical Portfolio please refer back to our first post. (click here) In short you will see what adjustments we make throughout the year on a $1 million dollar portfolio and how that performs relative to a portfolio that is rebalanced once per month with an allocation of 60% Stocks and 40% Bonds.
Here’s the current summary of the overall portfolio mix, which is updated as of this writing (March 31, 2014).
What adjustments did we make?
On March 3rd, we kicked off the month with some dividends from several Bond ETF’s (JNK, LQD,MBB, and BND). These all get swept into our cash account which then get deployed to other investments. Speaking of dividends, our equity ETF’s also had some healthy yields come into cash on the 25th of the month. (namely IVV, VB, VO, VNQ, VEU, and VWO) People often forget just how much these core investments pay in yield but they are as follows: (1.82%, 1.27%, 1.14%, 3.83%, 3.19%, and 2.88% respectively)
3/10/14: Sold 100 shares of VB (Vanguard Small Cap ETF) (~$11k total)
3/17/14: Sold 494 shares of STIP (iShares 0-5 year TIPS Bond ETF) (~$50k total)
3/24/14: Bought an opening position in BlackRock Strategic Income Opportunities Portfolio Institutional Shares (BSIIX) with 6,248 shares @ $10.26 (~$64k total)
We didn’t make too many moves this month but the main adjustment was to continue our preparation for what we believe is developing; a correction in possibly both equities AND relative underperformance in passively managed bonds. (more on this later)
As for the standard and passively managed 60/40 Benchmark we made the monthly and automated adjustment to the allocation. Much like last month the 60/40 model called for a slight paring back on Bonds with the proceeds going back into Stocks:
3/31/14: Sold 21 shares of BND (Vanguard Total Bond Index)
Bought 28 shares of IVV (S&P 500 Index)
The MPG Core Tactical Portfolio is still in defensive mode. It’s actually quite amazing that it’s held up as well as it has considering our light exposure to equities and a stock giving back quite a bit of profit. Tesla Motors (TSLA) had a brutal March giving back about -17% of return that we enjoyed (at least on paper) last month.
For the first quarter of 2014 the MPG Core Tactical Portfolio was neck and neck with the S&P 500 but took on far less risk in achieving about the same return (+1.50% to +1.69% respectively). The passively managed 60/40 Benchmark is leading the pack turning in +2.49% for the quarter.
Where are we going from here?
The MPG Core Tactical Portfolio took money off the table in both Small Cap and passively managed Bonds for one simple reason; each is showing continued warning signs of choppy waters ahead. The challenge in a market like this is that you almost are forced to ignore traditional warning signs of a market that is artificially inflated, way ahead of itself, and flat out frothy.
Small Cap (VB) is the asset class that typically breaks down first during overbought conditions but is also the one that leads the rally from the bottom after a bear market or substantial correction. With the small sales proceeds from selling a portion of VB we added that to the sale of STIP which is essentially dead money right now. If you’re managing a bond portfolio right now you better hope you either know what you’re doing or have someone who is nimble and sharing more expertise aside from “shorten your maturity” before interest rates rise. We’ll write more on this in the future but we firmly believe that if there ever was a time to use an actively managed bond manager that has the ability to long and short…now is that time.
From a technical standpoint the S&P 500 could actually break out to higher levels and continue to defy odds. Some of the technical analysis that we follow is keenly focused on whether the S&P can close and maintain above the 1,883 level; if it does even the most bearish investors will be forced to nibble more as the breakout could ruin 2014 with missed upside.
Keep an eye out for Q1 earning reports. Once those start rolling out we believe you’ll get a decent feel for some direction at least in the next quarter. Corporate America is as bearish and pessimistic as ever as we head into the upcoming Q1 earnings season next week. We actually believe some of this could set the table for the market to spike higher. Many companies are trying to under-promise and then “surprise” with decent earnings numbers and that can trick the investing public into thinking there’s still plenty of steam left in this long-toothed bull market! After that a correction is all but guaranteed and even if we finish the year higher (which we think is highly likely) it simply won’t feel good…or real.
See you next month!