Investors have hit pause on equities – evaluating a new set of risks. For example, the S&P 500 is now trading close to the same level it was at the end of January. 8 months of gains gone! The world’s largest index is up ~10% year to date… losing 2.4% this week. When you consider the S&P 500 lost ~19% last year…. it has not been a good two years. This post looks at why the outlook has deteriorated with 4 key charts: (i) 10-year yield; (ii) 10-2 yield curve; (iii) VIX; and (iv) gold – which touched $2,000 this week. What does it all mean?
"Asset Allocation"
Rethinking Asset Allocation
Last week we were treated to another thought provoking memo from Howard Marks. Apart from Warren Buffett and Stan Druckenmiller – very few investment managers boast a better 40+ year record than Marks. These investing legends rarely speak. But when they do – pay close attention. Marks’ note was follow-up to his previous memo titled “Sea Change”. Here’s the TL;DR: investors need to re-think their longer-term investment strategies. He is of the view the next decade (or more) won’t be the same as the last. A rising tide is unlikely to lift all boats. However, this also brings meaningful new opportunities for double-digit returns. We just need to start looking in different ‘pockets’.
The One Chart that Matters Most
If you were asked what is the most important metric in global finance – what would you answer be? The S&P 500? The US Dollar? Gold Something else? My answer is the US 10-year yield. Everything in finance is a function of this asset. For those less familiar with the game of asset speculation – this is a very important concept to understand. What’s more, its importance extends well beyond the stock market. To begin, the US 10-year yield is the proxy for financial instruments such as your mortgage, your car loan, student debt, your credit card etc. More than that – how this bond trades also signals investor confidence.
Think About Adding Bonds
For me, 2023 has been a year of repositioning and managing risk. I lowered my exposure to large-cap tech (down to ~20% portfolio weight) and increased exposure to banks, energy and some industrials (which all trade at reasonable valuations). Today I will look at two bond ETFs – which I think could warrant exposure in your portfolio. In summary, with the US 10-Year yield back above 4.0% – it pays to add some longer-term duration.
For a full list of posts from 2017…