Portfolio Shield – April 2023

Even though the stock market appears to be moving on from the banking crisis, the bond market was never fooled. The inverted yield curves suggested something bad was likely to happen and now that the curves are steepening, they are indicating a recession, despite what the equity markets indicate, is nearly a sure thing.

The 2-10s yield curve has started rising as 2-year Treasury yields are falling faster than 10-year Treasury yields. This rise in the yield curve, as indicated by declining yields, is referred to as a “Bull Steepener”.

Bull Steepeners, as defined by a decline in Treasury yields, is bullish for bond prices, which we believe have the potential for a significant upside return over the rest of the year.

The early phase of a decline in yields is also commonly bullish for equity prices, at least in the short term. Looking over the early phase of the past three Bull Steepeners, equity prices rallied back to or slightly above all-time highs.

For this reason, Jeff and I maintain our view that stocks can still rally over the next several months.

Portfolio Shield™ is currently positioned to take advantage of a rally in both stocks and bonds.

Looking forward, our Chief Strategist Jeff Snider shares his outlook on the global economy.

Following a brief flirtation with “soft landing” even “no landing” scenarios shared by many during February, we leave March with a very different tone. The long-predicted and expected deflationary money outbreak reared its ugly head once more, though unlike those last year this one was widely acknowledged (it was rather hard to ignore or dismiss).

It is now universally accepted that there will be consequences here in the US as well as abroad. Those begin with the banking/monetary system though, as usual, there won’t be any consensus on what that might mean in the short run. More failures? Would those even matter?

Market positions indicate whether or not more individual institutions find themselves in the same trouble as SVB or Credit Suisse won’t make much difference to the overall situation. Curves are positioned – still – as though the worst remains in front of us, in technical terms a very high probability of a series of rapid rate cuts likely spanning the entire second half of the year.

In addition to possible financial consequences, there is going to be serious economic fallout over the months ahead, too. Initially those will be downplayed, too, which is standard for periods like this. 

But, again, market positions are very clear in anticipating more severe outcomes, probability distributions for the global economy and global markets that are even more decidedly skewed to the downside now that March’s events have simply confirmed the beginning for what was suspected all along.

There were very slight changes to the Portfolio Shield™ equity allocation for March.

Looking ahead, May is the first month where there is a possibility the strategy will hedge with long-term bonds and will likely remain hedged for June and July based on current market conditions.

We are considering adding additional equity funds to the allocation using the same one-month momentum screen from Momentum Timer Pro™ as we have done with the bond allocation where the funds are only added for the month when their one-month momentum screen is positive.

One of the challenges money managers face is trying to find funds that are not highly correlated with the major equity indices. We have identified three ETFs that are suitable for consideration as they also have enough liquidity, in terms of trading volume, for the strategy.

The three equity funds we are considering, which have a low or negative correlation to the S&P 500 and Nasdaq-100, and each other, are iShares MSCI Emerging Markets ETF (EEM), VanEck Gold Miners ETF (GDX), and Energy Select Sector SPDR® ETF (XLE).

These funds may be added at any future rebalance.

These changes we are considering to the equity allocation will move Portfolio Shield™ more towards a true monthly rotational momentum strategy.

The Growth, Balanced, Income, and Conservative models have added a position in HYG and IEF for the bond allocation for April.

Based on the current one-month momentum screen applied to the bond allocation, the strategy recommends adding HYG and IEF from the allocation for the month.

Overall we are pleased to see the implementation of the one-month momentum screen to the bond allocation had a positive impact on the returns and risk of the bond allocation.

Going forward, the bond allocation will hold a static position in AGG and add HYG and IEF to the allocation when their respective one-month momentum screens are positive.

If the one-month momentum screen for both HYG and IEF is negative, the bond allocation will add SHY iShares 1-3 year Treasury Bond ETF in an attempt to control downside risk from declining bond prices.

We will continue to run the additional one-month momentum screen, from the Momentum Timer Pro™ report for HYG and IEF, and make adjustments to the bond allocation each month for the Growth, Balanced, Income, and Conservative models based on its recommendations.

We are also considering dropping AGG from the bond allocation in the future and having the strategy rotate each month between HYG and IEF when their respective monthly momentum screens are positive, and when neither of them is, allocating to SHY.

This change may be made at any future rebalance.

As a reminder, all strategies are rebalanced on the first trading day of each month and at that time, any new monies are invested according to the model strategy you are in.

For those who want to change between strategies, changes will occur at the next rebalance.

Zero balance accounts that have had a zero balance for six months or more will be closed and where applicable, the advisory agreement terminated. There is only a 0.3% allocation to cash in each model. Due to a misreporting between Morningstar® and the ETF providers, the Asset Allocation box on the fact sheets may show a higher cash position than is actually in the model.

If you have any questions or would like to change which Portfolio Shield™ strategy you are invested in, please let me know.

The latest Morningstar® Investment Detail Reports for the Portfolio Shield™ family are available on the Portfolio Shield™ website.

Thank you for your continued trust in allowing us to manage your money with Portfolio Shield™.

Thank you,

Steven Van Metre, CFP®
Jeffrey Snider