Six Week Market Recap: How Fundamental Data Has Impacted Cabana’s Allocation – November 18, 2019

5 years ago

  • Share this:

We hosted our monthly advisor webinar on Friday and touched on a variety of tools and resources we have in the works at Cabana, as well as the markets’ performance over the past six weeks. We often receive questions from advisors about how and when we know to reallocate portfolios, and this past week was no different. I’d like to use today’s commentary to walk through our process and how you can follow along.

Our rules-based investment process:

First, let me say that we are not psychic, and we do not have all the answers. What I believe we do well is recognize what is important and what is not. We also have a rules-based process that is integrated into our algorithm and reflects a simple but time-tested approach to investing. Our algorithm is monitoring interest rates, earnings and price. These data points form the foundation of our investment process. In other words, these simple pieces of information give us clues as to what assets will be attractive and what assets will not. When combined, they can form a powerful tool for investing. We do not always get it right nor do we expect to. We do however want to put odds of a correct decision in our favor as much as possible.

With that, let’s take a look at what we have reported in our commentaries since September. I believe it will give considerable insight into our process of allocating assets.

A look back at the past six weeks:

September 30: We noted continued mixed messages in the market. While markets saw selling and we were in a technical manufacturing recession, jobs numbers were strong, the yield curve was improving, and we were only 2% below all-time highs in the major indexes. We called the glass “half full” and commented that dividend payers, defensive equities and real estate were attractive. Shortly after this commentary our algorithm signaled a reallocation to less risky assets.

October 7: We felt that the jury was still out and explained that the previous six months of range bound volatility would result in the market giving us a “verdict”. We were looking for a breakout above or below the range and provided the levels on the S&P 500 that we were watching (2720 and 3000).

October 14: We suggested that the “news” doesn’t matter. What does matter is interest rates, earnings and price. We noted that earnings would ultimately carry the day and were looking forward to the beginning of earnings season the following morning.

October 18: Our algorithm signaled a reallocation to more bullish conditions. This was primarily due to changes in price of the broad markets, as well as initial earnings reports that had come in over the previous three days. Our algorithm observed that things were “better” and that we should reallocate to assets that outperform in a “better” market environment.  We began the process of reallocating our portfolios and notified our advisor partners.

October 21: We noted stellar earnings reports from financial institutions and outperformance in the transportation sector. At that point, the yield curve had maintained a better spread between short- and long-term interest rates. We also pointed out that equity markets were right at all-time highs and we were watching for a breakout and fourth quarter rally.

October 28: The breakout above 3000 on the S&P 500 had occurred. We identified rotation into higher beta assets as further evidence that professional investors were reallocating in response to growth prospects improving. We were watching for buying in energy, commodities and transportation. As soon as we said it, that’s what occurred.

November 4: We pointed out that the fourth quarter rally was officially on us, and were watching for outperformance in risk assets like small caps, emerging markets and industrials in order to continue.

November 6: We provided a chart visually showing positive money rotation into risk assets and out of defensive positions during October and early November.

November 11: We discussed the rally and what to expect going forward. We highlighted improvements in global markets and how that could provide support to our market going forward. Lastly, we talked about how markets are forward looking and how that coincides with the performance we saw in 2018 and this year.

What’s happening now?

As of today, 92% of companies have reported earnings. Of those, 75% have beaten estimates and 60% have reported positive sales surprises. Year-over-year earnings growth is 9%. The 10-year Treasury is at 1.81%, up from 1.55% at the beginning of September. The spread between the 10-year and 2-year Treasury has increased 20 basis points during that time. These fundamental data points are what matters and is what is driving the rally we are currently seeing in equity markets. It is also what dictated our decision to reallocate to more bullish conditions on October 18, when price improved. Since then the market has rallied almost 5%. While price had not officially broken out on October 18, things underneath the hood were getting better. Things that matter like interest rate spread and earnings. Those factors increased the chances that the improvement in price was meaningful and that a reallocation to assets that would benefit from these conditions was appropriate. As an investor, that is all you can do – gather relevant information and make investment decisions accordingly. But what is relevant information? Each of us must make that determination on our own and on our own terms.

I hope this outline, as well as review of our commentaries over the past weeks, will help our partners and clients better understand our process. We are far from perfect, but we try to always be transparent. Allocation history back to 2017 can be found here.

Download a PDF of this commentary at the following link:

Disclaimers

January 17, 2024

This material is prepared by Cabana LLC, dba Cabana Asset Management and/or its affiliates (together “Cabana”) for informational purposes only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. This material may only be distributed in its original format and may not be altered or reproduced without the prior written consent of CabanaThe opinions expressed reflect the judgement of the author, are as of the date of its publication and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by Cabana to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by Cabana, its officers, employees or agents.  

“CARA” is Cabana’s Cyclical Asset Reallocation Algorithm. Scenes assigned as per the judgment of The Cabana Group. Scene names and number of scenes have changed over time in an effort to obtain efficiencies and provide clarity of investment objective. 

This material may contain ‘forward looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. All investment strategies have the potential for profit or loss. All strategies have different degrees of risk. There is no guarantee that any specific investment or strategy will be suitable or profitable for a particular client. The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal.  

Cabana LLC, dba Cabana Asset Management (“Cabana”), is an SEC registered investment adviser with offices in Fayetteville, AR and Plano, TX. The firm only transacts business in states where it is properly registered or is exempted from registration requirements. Registration as an investment adviser is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability. Additional information regarding Cabana, including its fees, can be found in Cabana’s Form ADV Part 2A or Form CRS. A copy of which is available upon request or online at www.adviserinfo.sec.gov/. 

Past performance is no guarantee of future results. All investment strategies have different degrees of risk and the corresponding potential for profit or loss. Asset allocation and diversification will not necessarily improve returns and cannot eliminate the risk of investment losses. “Target Drawdown” is merely a descriptive term used to describe the general strategy and objective of the portfolio, it is not a guarantee, nor should it be construed to suggest safety or protection from loss. There is no guarantee that portfolio performance will remain consistent with the targeted drawdown parameter. While risk tolerance and targeted “drawdown” are identified on the front end for each portfolio, Cabana’s algorithm does not take any one client’s situation into account and there is no guarantee that Cabana’s strategies will be suitable for any investor. Investors and advisors should not simply rely on the name of any portfolio to determine what is suitable. It is the responsibility of investment advisors to determine what is suitable for their clients. Cabana manages assets on multiple custodial platforms. Performance results for specific investors will vary based upon differences in associated costs and asset availability.  

Cabana claims compliance with the Global Investment Performance Standards (GIPS®). GIPS® is a trademark of the CFA Institute. The CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein. To receive a GIPS Report and/or a firm’s list of composite/pooled fund descriptions please email your request to info@thecabanagroup.com.

All recommendations made in the prior 12 months are available upon request. Cabana’s allocation history is available here. For additional information regarding our services, including performance disclosures and award methodology, please visit https://thecabanagroup.com/disclaimers/. 

Commonly used index/benchmark definitions:  

All indices and categories are unmanaged and an individual cannot invest directly in an index or category. Index returns do not include fees or expenses. Benchmark indices will likely materially differ from Cabana’s portfolio strategies. Detailed information as to how the returns are calculated can be obtained online from the following link: https://thecabanagroup.com/disclaimers/performance-reporting-methodology/. 

Morningstar’s Moderate Target Risk index  follows a moderate equity risk preference and is based on well-established asset allocation methodology from Ibbotson Associates, a Morningstar company.  

Morningstar’s Tactical Allocation category includes portfolios that seek to provide capital appreciation and income by actively shifting allocations across investments. These portfolios have material shifts across equity regions, and bond sectors on a frequent basis. 

The S&P 500 Index is a market-capitalization weighted stock market index of 500 widely held large-cap stocks often used as a proxy for the U.S. stock market.  

The Russell 2000 and 3000 indices are market-capitalization weighted stock market indices that include, respectively, 2000 and 3000 of the most widely-held stocks and are often used as proxies for the U.S. stock market. 

The Nasdaq Composite Index is a market-weight capitalization index that covers more than 3,000 stocks listed on the Nasdaq Stock Market. What is the Nasdaq Composite, and What Companies are in It? | Nasdaq