Maintaining Asset Allocation


With another pause in the ramping up of the trade war, markets were feeling bullish Monday morning. However, that bullishness has been fading as the day went on. Maybe markets realize there was no real trade progress made. Maybe the markets are focused on other things.

Back From Vegas

I am back from 3 weeks in Las Vegas and I know the question most folks want to ask: did I win? Well, that’s a yes and no answer. I won quite a bit playing poker for cash. I spent all of that money on tournament entries that I didn’t make the money in. And, I lost a little bit at table games, you know, playing against the house.

Overall, I was down a little, but am able to rationalize that if I just stick with cash poker next time, I’d be a winner. Of course, who can resist the lottery ticket of a tournament or throwing caution to the wind with blackjack or roulette?

More than anything, it was an educational trip. Among the things I get to do at a poker table, in restaurants and in cocktail lounges is get to talk to people. I talked with a lot of successful people in just 3 weeks.

The summary of what I heard and learned is this: the American economy is doing well, but it’s not getting better anymore. We’re running in place after a long and large advance.

As I talked about in Friday’s webinar, rates of change are important. When growth is accelerating, the bull runs hard. When growth is decelerating (still growing, but less than before), the markets get choppy – that’s where we are now. When growth stops, the bear eats the market.

Risk Is The Same

In April, I reduced equity exposure after the Q1 rally. It was a good time to do so as the market corrected in May. In June, the stock market rallied.

If we were more active traders, we could have tried to trade the June move up. However, we would have been guessing as nobody knew or knows what the outcome will be on trade.

The markets are behaving today as if risks of an economic slowdown in 2020 have dispitated. That is not so. Virtually every indicator points to a topping process going on. Here are some indicators pointed out by Eric Basmajian over at FATrader:

Falling construction spending is indicative of the financial crisis era responses coming to an end and why there is talk of an infrastructure bill. It is also indicative of “slow growth forever.”

Residential construction spending is falling off a cliff again.

Manufacturing PMI is positive above 50. Right now there are 28 countries/regions below 50. That is indicative of pending economic contractions.

As we’ve discussed, the canary in the coal mine is employment. If unemployment does more than tick up a tenth or two-tenths of a point, then we need to be scared. Increasing unemployment leads to less spending and people cashing in retirement plans. Those are bad for the economy and equity markets.

Asset Allocation Remains The Same

The temptation with rebound rallies and “not bad” news is to pile into the stock market. I think the more prudent approach is look for a rally to scale back equity exposure even more by Q1, 2020.

Remember, next year, if I am right and President Trump loses, then people will sell stocks to avoid losing tax breaks.

We made our asset allocation less aggressive on April 9th. We are making no changes at the new highs. Here is the maintained asset allocation chart:

Change DatesAsset ClassAggressiveModerate Conservative
April 9, 2019Large Cap20.00%15.00%10.00%
Mid Cap20.00%15.00%10.00%
Small Cap15.00%5.00%5.00%
Int’l Developed5.00%5.00%5.00%
Int’l Emerging5.00%5.00%5.00%
Corp Bonds0.00%0.00%0.00%
Govt Bonds0.00%0.00%0.00%
Int’l Bonds0.00%0.00%0.00%
Cash35.00%55.00%65.00%