Shortly after the strategy began hedging in October by reducing its equity allocation for a position in long-term bonds, the markets began pricing in a Republican sweep of both the White House and Congress.
The market reaction, or “Trump trade”, was long stocks and short bonds as the market believed an all-Republican government may lead to higher deficit spending and inflation.
The long-term bond position declined, which caused an underperformance in the equity allocation for October.
The long-term bond hedge has been removed for November as the strategy no longer meets the conditions to remain hedged. Looking forward, the equity allocation is unlikely to be hedged again for the foreseeable future.
As for the bond allocation, it too was negatively affected by higher interest rates as well. It gave back some of its returns over the prior two months.
Momentum turned sharply negative for both intermediate-term Treasuries and high-yield bonds, which is why the strategy is shifting into short-term Treasuries for November.
Portfolio Shield™ increased its equity position to SPY and QQQ and removed its position in TLT for November.
Portfolio Shield™ remains positioned to take full advantage of a continued rally in stocks.
Stocks can continue to rally as investors are very bullish on stocks and the hopes of a soft landing, corporate share buybacks continue at a large pace, and investors believe Federal Reserve rate cuts are bullish for equity prices.
We continue to evaluate the options outlined in last month’s update for the equity allocation to move Portfolio Shield™ more toward a true monthly rotational momentum strategy.
We are in the early stages of building a new model that could be used in a rotational equity model, which I am rather excited about.
Our programmer has been working on building an internal back-testing program to ensure that our goal of building a fully rotational model can be supported by testing against historical returns.
The Growth, Balanced, Income, and Conservative models removed their position in HYG and IEF and added a position in SHY to the bond allocation for November.
Based on the current one-month momentum screen applied to the bond allocation, the momentum for both HYG and IEF was negative last month.
When momentum for HYG and IEF is negative, the strategy repositions into short-term Treasury Bills for the month.
Portfolio Shield™ is positioned to reduce the risk of rising interest rates.
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.
If you have any questions or would like to change which Portfolio Shield™ strategy you are invested in, please let me know.
Thank you for your continued trust in allowing us to manage your money with Portfolio Shield™.
Thank you,
Steven Van Metre
