OVERVIEW
The “trade rotation” that began 3/12/21 continued in April. This is certain major vested interests trying to reverse the significant underperformance, that began in October 2020, of the S&P 500 (primarily Large Cap Growth stocks) and US Aggregate Bonds (Interest Bonds) against other equity and bond asset classes. The trade rotation requires undoing the economic growth narrative that was underpinning the outperformance of those other asset classes. Thus, the spin: reflation news already priced in; risks to reflation rising – Eurozone Covid spikes, Covid warnings in US rising, US/China tensions, too much debt.
None of this bears much resemblance to the actual economic news. Manufacturing data shows a sector that is not only strong but, accelerating. Many indicators hit records such as: highest in 17- year history; 30 year high; highest in nearly 38 years; nearly a 40- year high; sharpest in 48 years; highest in the history of the survey. The service sectors were also posting near record high readings which in many cases extended 7 consecutive months of such high readings. While housing numbers dipped from the “February Freeze”, they thawed out quickly with eye popping numbers for March Starts and Permits and April’s Housing Market Index. While these leading indicators are pointing to very strong growth for the rest of the year, that is on top of what is currently very strong growth. This was dramatically demonstrated with the blowout March Jobs Report showing 916,000 new jobs. As to the risks of Covid in the US, the problems in Europe, India and South America relate in large part to their slow vaccination rate. Percentages of the population vaccinated with at least one shot are as follows: US 45.3%; Germany and France average 27.6%; Brazil 14.7%; India 9.5% (Covid Tracker as of 5/4/21). More importantly, US vaccinations were initially targeted to the elderly and other “at risk”persons. Overseas, despite the virus issues, Germany and India produced strong manufacturing data. The UK, with the ending of its virus restrictions, produced strong rebound numbers in manufacturing, housing and retail. Even Japan, which has been a laggard in this recovery, is signaling a global surge may be underway.
However, the rotation trade resulted in the S&P 500 outperforming Foreign Developed which exceeded Emerging Markets. Growth outperformed Value and Large Caps over Small Caps.
Bonds did not confirm the equity action. Although Interest Bonds generated a fractional positive return, Credit and Blend outperformed.
Also, Commodities did not confirm the equity action. Energy, Industrial Metals and Agriculture were up more than the S&P 500.
April 2021
Monthly Commentary
PERFORMANCE
TAG TACTICAL STRATEGIES: Global Macro
Tactical Conservative generated returns more than its proxies due to its overweight in Credit Bonds which includes positions in Gold and Real Estate. Tactical Moderate and Tactical Growth garnered a substantial portion of their proxies but were held back from their overweight to Foreign Developed, Emerging Market and US Small Cap Value Equities.
Tactical Income’s overweight to Credit drove its positive return. Its yield was at 5.00%.
Tactical Equity garnered a substantial portion of its proxies, but it was held back from over-weights to Emerging Markets and US Small Caps.
RPg STRATEGIES: Quantitative Formula
Tactical US Equity garnered a substantial portion of its proxies due to allocations in several Large Cap Growth sectors. Tactical US Equity FT had a lower return due to its Small/Mid Cap bias.
Tactical Global Balanced garnered a substantial portion of its proxies but was held back from allocations in Emerging Market and Foreign Developed Equities and US Value Sectors.
OUTLOOK
The final two virus related impediments to full economic recovery are coming under increased pressure to change. The “maskerade” was fully revealed with President Biden the only person wearing a mask on a global climate Zoom call with other world leaders. The final unraveling came with his selectively wearing a mask outdoors in contradiction to new CDC guidelines not requiring masks outdoors for vaccinated persons. Masks are not just a “small gesture” (President Biden NBC 4/29/21). They perpetuate an aura of fear which impairs a certain number of people from fully reengaging in society. This proposition was elucidated in a June 17, 2020 research report by Austan Goolsbee of the University of Chicago: Fear, Lockdown, and Diversions. The report concluded that government policies were less impactful on individual behavior choices than fears of infection. Maintaining an aura of fear, hence a crisis, can be used to justify more governmental programs. The second impediment that looks to be at the breaking point is school reopenings. The politics of teacher’s unions in defiance of CDC guidelines for reopening schools has finally sent parents on the offensive. Many parents stuck at home with their children for at home schooling, who cannot go to their out of home jobs, are exacerbating the current shortage of employees. This is not to mention for all parents stuck at home, the negative impacts on their children and the family dynamics. Therefore, absent some wild card with the virus, it would appear schools will be fully reopened come fall (sans masks, plastic dividers, curtailed activities).
We expect the explosion of new social programs and attendant tax increases that have been proposed will undergo significant modification before they see any passage by Congress. However, whatever does evolve, we expect it will be additive to economic growth over the next two years. However, they will increase the risk of too much inflation.
Therefore, the TAG and RPg strategies remain allocated to those asset classes that should be the primary beneficiaries of a strong economic growth outlook.
We welcome your comments on the foregoing.
Please direct them to support@riskparadigmgroup.com
Important Disclosures:
Risk Paradigm Group, LLC (RPg Asset Management or RPg) is a registered investment advisor with the U.S. Securities and Exchange Commission (SEC). Tactical Allocation Group (TAG) joined Risk Paradigm Group, LLC and became a division of the firm on July 22, 2016. Additional information regarding Risk Paradigm Group, LLC can be found on our website at www.rpgassetmanagement.com. RPg does not provide tax or legal advice. Please consult an independent tax advisor for additional guidance.
This material has been prepared solely for informational purposes and is not to be considered investment advice or a solicitation for investment. Performance provided is past performance. Past performance is not indicative of future results. Investments may increase or decrease in value and are subject to a risk of loss. As with any investment strategy, there is potential for profit as well as the possibility of loss. No representation or warranty is made that any returns indicated will be achieved. Investors should consult their financial advisor before investing.
Any projections, market outlooks, estimates or expectations of future financial or economic performance of the markets in general are forward-looking statements and are based upon certain assumptions and should not be construed as indicative of actual events that will occur. Actual results or events may differ materially from those projected, estimated, assumed or anticipated in any such forward-looking statements. Information contained herein is as of the period indicated and is subject to change. Any views expressed herein are those of the author(s) at the time of writing and are subject to change without notice.
The information contained herein includes information obtained from sources believed to be reliable, but we do not warrant or guarantee the timeliness or accuracy of the information as it has not been independently verified. It is made available on an “as is” basis without warranty.
This material is proprietary and may not be reproduced, transferred or distributed in any form without prior written permission from RPg. RPg reserves the right at any time, and without notice, to change, amend, or cease publication of the information contained herein. RPg may change any exposures and compositions reflected herein at any time and in any manner in response to market conditions or other factors without prior notice.
References to Indexes: The S&P 500 Index is an unmanaged index of 500 stocks that is generally representative of the equity performance of larger companies in the U.S. Please note that an investor cannot invest directly into an index.
Risk Disclosures: Concentration, volatility, and other risk characteristics of a client’s account also may differ from the information shown herein. There is no guarantee that any client will achieve performance similar to, or better than, the strategy mentioned herein.
Sources: Bloomberg.
For more information, including risks of investing in our strategies, visit our website at www.rpgassetmanagement.com.