Tempus Research Update – July 2019

What You Should Know

Following May’s S&P 500 sell-off of -6.35%, June rallied back +7.05% on a total return basis to finish the two consecutive months in the positive and just below all-time highs. International markets, such as the MSCI EAFE, which includes 21 developed nations outside of the US and Canada, encountered a similar down-in-May and up-in-June type of experience.

Our view is that the market and global economy currently sits in a transitionary period, where headlines and macro developments can have a significant impact on price. Volatility to the downside and upside can attract investors who have been waiting for their opportunity to buy or sell, where their activity can further propel the velocity of the market’s trend. For both the U.S. and International markets, bad news can be viewed as good news for investors. The June report of job hiring numbers in the U.S. missed economist’s expectations by a significant margin, which increased the Federal Reserve’s probability of reducing short-term Federal Funds interest rates and seemingly increased the risk appetite of equity market participants at the same time. Meanwhile overseas, Mario Draghi, European Central Bank President, stated that another round of economic stimulus in the form of bond buying “will be required” if the economic backdrop of the EU does not improve, causing markets to rally to the upside. Emerging markets also experienced a positive June, as they remain the least expensive of the three categories on a price-to-earnings basis and could benefit from the developed nations central banking activity and trade negotiations.

Tempus Strategy Series Overview

Tempus offers 12 actively managed investment strategies ranging from Aggressive to Conservative. Market and Economic risk factors are monitored on a regular basis and allocation changes and/or holding changes are made based on the decisions made by the Tempus Advisory Group Investment Committee. Additional details on each strategy can be found on our Resources page.

 

Strategy trading activity commentary:   While economic data has not changed in any significant manner since May, short-term market data has improved sizably. The S&P 500 began the month of June below its 8-month and 12-month moving averages and closed the month well above those same averages. Credit spreads have remained relatively flat since April, which has not caused concern on our bond allocation. However, we are attentive to the Treasury Yield yield-curve which is inverted on the short-end due to artificial action from the Federal Reserve, while the long end of the curve continues to feel some downward pressure from demand in global markets.

Strategy Changes:

  • Alpha, Opportunity, Balanced
    • Due to the key calculation metrics for this series of investment model portfolios, as well as the comments on trading activity, we found no need to make any changes to the equity exposure at this time.
  • Equity
    • Due to the key calculation metrics for this model portfolio, as well as the comments on trading activity, we have decided to increase the equity exposure from half to the full amount, from 50% equities/50% bonds to 100% equities.
  • Diversified
    • Due to the key calculation metrics for this model portfolio, as well as the comments on trading activity, we have increased its equity exposure from half to the full amount, from 60% equities/40% bonds & alternatives to 80% equities/20% bonds & alternatives.
  • Adaptative
    • Due to the key calculation metrics for this model portfolio, as well as the comments on trading activity, we have increased its risk exposure from 40% equity/60% bonds, to 60% equity/40% bonds.

 

Strategy trading activity commentary:   Market volatility holds the highest criteria weighting for the Managed Risk Models, and due to the recovery from May’s pullback, measures of volatility are within the natural range of expectations. More specifically, the year-over-year average of the S&P 500’s implied volatility is below its five-year average, the S&P 500’s price is below its 10-month moving average, as well as its 12-month moving average. As for the fixed income positioning, global balance sheet risk is also below cause for concern. Credit spreads between the yield of Global High Yield and the U.S. 10 Year Yield remain below their alarm level. Other indicators of yield spreads were within a comfortable range regarding the fixed income portion of the Managed Risk Models.

Strategy Changes:

  • Due to the key calculation metrics for this series of investment model portfolios, as well as the comments on trading activity, we found no need to make any changes to the equity exposure at this time.

 

Strategy trading activity commentary:  Since the beginning of 2019, the yield on the 10-year U.S. Treasury has been reduced dramatically which increases the concern of an upward shift in interest rates in the future. Therefore, the models have moved away from longer duration Treasury and Corporate bonds to shorter duration Treasury and Corporate bonds. Also, due to credit spreads tightening, the U.S. High-Yield asset class has been added to provide additional yield while price action in the asset class re-mains favorable.

Strategy Changes:

  • Researched Fixed Income has added 5% allocation to International bonds and replaced the U.S. Treasury positions into U.S. Corporate High Yield.
  • Researched Strategic Income has added 5% allocation to International bonds and replaced the U.S. Treasury positions into U.S. Corporate High Yield.

 

Strategy trading activity commentary:   Due to the nature of the Researched Balanced Income Model seeking to optimize yield in a 2% range above the 10-year U.S. Treasury yield, this quarter’s rebalance provided an opportunity to slightly take risk away from the model as the 10-year U.S. Treasury yield has fallen. Therefore, we found it prudent to reduce position sizing in the asset classes of International Equity, long duration U.S. Corporate Bonds, U.S. Corporate High Yield, Global High Yield, Emerging Market Bonds, and Global Real Estate. All the mentioned have been shown to be sensitive to interest rate movements, and with the current global pressure on longer duration yields, we adjusted the allocation to best fit the current yield environment.

Strategy Changes:

  • Yield target set to 4.01%.
  • Positions were adjusted to reduce risk and add higher quality bonds.

Financial Advice is offered through Mid Atlantic Financial Management, Inc. (MAFM) a Registered Investment Advisor. Tempus Advisory Group is not a registered entity or a subsidiary or control affiliate of MAFM.  The information contained in this e-mail and in any attached files is confidential and intended for internal use of the individual named in the email. This information should not be duplicated or distributed unless an express written consent is obtained from Tempus Advisory Group in advance.  If you are not the intended recipient, please notify me immediately and delete any attachments.  The views expressed here reflect the views of the Tempus Advisory Group Investment Committee as of 7-3-2019. These views may change as market or other conditions change. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Past performance does not guarantee future results and no forecast should be considered a guarantee either

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2019-07-05T14:33:31+00:00