Aiming to shrug off the bad taste left by the 6% drop in May, stocks in June rallied back to almost exactly their levels at the end of April. While investors breathed a sigh of relief that the decline did not continue, stocks have remained unable to break through the high first hit back in September. In fact, the S&P 500 index is only 3% higher than the levels of January 2018. Each time stocks have attempted to break out into a new uptrend, they have failed.
The chart above shows the S&P 500 index of large U.S. stocks struggling to break out into a new uptrend over the past 18 months. The difficulty is even more pronounced when looking at charts of other stock indices. The Value Line index of 1,700 U.S. stocks, shown in the chart below, more accurately portrays how the average stock is performing. Notice that after the peak in September 2018, the subsequent highs in April and June were lower. From a technical perspective, this is troubling. It highlights that while a handful of stocks are close to breaking out to new highs, the average stock still has a ways to go.
As stocks rebounded in June, FSA portfolios reinvested some of the cash from the sales in May. For the most part, we continue to invest in large-cap U.S. growth-oriented areas of the market as this segment continues to lead other asset classes and sectors. Strategies with higher equity allocations (Conservative Growth, Core Equity, Tactical Growth) remain below their maximum allocations to equities until the broad market can re-establish its uptrend. On July 1, the S&P index closed slightly at an all-time high (as seen on the first chart), so if stocks can maintain some momentum from here, we will bring the portfolios back to fully invested. As noted above, however, while the market leaders (as represented by the capitalization-weighted S&P 500 index) could be breaking higher, the average stock (as represented by the Value Line index) still has some work to do.
As a trend follower, we want to see stocks clearly moving to an uptrend before getting the portfolios to a fully invested level. Given the uncertainty in the direction of interest rates and the ongoing trade spat with China, stock market sentiment seems to shift back and forth from concerns of a slowing economy to happy days are here forever.
Overall, we are relatively optimistic about the direction of stocks for the second half of the year, but we will be prudent and make sure the trend remains our friend before we move the portfolios fully into stocks.
Keep in mind that because we manage clients’ portfolios individually, the holdings for your particular accounts may differ somewhat from the averages.
Income (Strategy 1)
Earlier this year, Federal Reserve chairman Jerome Powell signaled that the Fed would not necessarily continue to raise interest rates, which gave a boost to bonds. Bonds of all types made money during the first half of this year. Within this strategy, we sold a global bond fund during the second quarter and moved the proceeds into a high yield bond fund. We also increased our allocation to high yield municipal bond funds by selling one of our intermediate-term high quality bond funds. Currently, the Income portfolios hold 40% in high yield bonds, 35% in higher quality intermediate-term funds and 20% in high yield municipal bond funds. The money market position remains near 5%.
Income & Growth (Strategy 2)
With stocks and bonds continuing to move higher, this balanced strategy remains a consistent performer. We increased the high yield bond allocation and reduced the intermediate-term high quality bond allocation. Entering the second half of the year, the portfolios hold 35% in equities, 40% in high yield bond funds, 20% in high quality bond funds and 5% in money market funds.
Conservative Growth (Strategy 3)
Trading was light in this balanced strategy as we have been content with the current portfolio allocation of roughly 60% in equities. During the May stock market drop, we sold the large-cap growth fund in the portfolio but bought a similar fund in late June as stocks recovered. In addition to the equity allocation, these portfolios hold 32% in bonds, with 8% in money market funds.
Core Equity (Strategy 4)
Trading picked up in the second quarter for this all-equity strategy as the market drop in May triggered some sales of our technology funds and more aggressive large-cap growth funds. Then, as stocks rebounded in June, we reinvested some of those proceeds in several large-cap funds. In addition, we added a precious metals fund because that area has perked up recently. As of the quarter’s end, this strategy held roughly 80% in equities and 20% in money market funds.
Tactical Growth (Strategy 5)
This strategy has relatively high turnover as it is looking for strong performance from narrow sectors of the market. In the second quarter, in addition to exposure to broad large-cap funds, these portfolios also held some commodities, as well as consumer staples, real estate and utilities funds. We sold the emerging markets component as it tripped its FSA Safety Net® during the May sell-off. As we enter the second half of the year, these portfolios hold roughly 35% to 40% in diversified equity funds, 30% to 40% in various sector funds, 5% in commodities, 5% in a Treasury bond fund and 15% to 20% in money market funds.
Sector Rotation (Strategy 6)
The volatility in the second quarter played havoc with this disciplined sector rotation strategy. After the May sell-off, this strategy picked up the inverse S&P fund as it had risen to the top among the ranked sectors. This fund fell in value as stocks rebounded in June and thus dragged down returns for the month of June. During the July rotation, the portfolios hold leisure, industrials, semi-conductors, financial services, banking and basic materials.
Please remember to inform your advisor of any changes in your life that could affect your investment objective and how we manage your money.
FSA Investment Team
Disclosures are available at https://fsainvest.com/disclosures/market-update/.
FSA’s current written Disclosure Brochure and Privacy Notice discussing our current advisory services and fees is also available at https://fsainvest.com/disclosures/ or by calling 301-949-7300.