“Adaptability is about the powerful difference between adapting to cope and adapting to win.” –Max McKeown

The S&P 500 has seen some downward movement this April, with notable volatility that saw a dip of 5.5% as of April 19.

However, don’t expect us to hit the panic button just yet. As staunch advocates of intermediate- to long-term trend following, we’re staying the course with our U.S. equity exposure heading into May. Market fluctuations like these are par for the course, and our strategies are built to weather such storms, which, truth be told, occur more frequently than one might think.

While passive asset managers might preach the same sermon of maintaining composure during market downturns, we stand apart from the crowd. Unlike the passive approach, we’re poised to take action when significant downtrends emerge. Our systematic investing process is finely tuned to filter out the noise but spring into action when there’s tangible evidence of a trend shift. It’s all about having a reliable, time-tested mechanism that signals the difference.

In this month’s note, we delve deeper into the S&P 500’s performance, particularly examining monthly declines of 5% or more. Moreover, we underscore one of the prime advantages of trend following: its capacity to guide investor behavior with a disciplined, repeatable approach that fosters rational decision-making amidst turbulent times. We firmly believe that this approach is the cornerstone of long-term wealth accumulation and is instrumental in helping our clients realize their financial aspirations.

But first, here’s a summary of our take on what transpired in the markets in April.

Asset-Level Overview

Equities & Real Estate

After a five-month winning streak, the S&P 500 Index finally hit the pause button in April, taking a breather with a dip of up to 5.5%. This decline wasn’t picky—it affected every major segment, with small caps and technology taking the hardest hits. Small caps, in particular, have now slipped into negative territory for the year, highlighting the significance of the downturn.

Despite the setback, the positive trends that have been driving U.S. equity returns remain robust. Consequently, our portfolios at Strategic Advisory Partners will maintain an overweight position in U.S. equities, with allocations generally increasing. Our risk management approach—based on a continuum—means stronger asset classes will step up to assume the allocations of weaker, yet similar, assets. This month, we’re seeing a shift from real estate securities to U.S. equities, a move guided by price trends.

On the real estate front, recent economic indicators have cast serious doubts on the possibility of lower interest rates in 2024. This has pushed the asset class into downtrends across various timeframes, prompting us to reduce allocations to their minimum level in our portfolios.

While international equities made strides in April, they’re still playing catch-up with their U.S. counterparts. Given their relative weakness, our portfolios will remain underweight. However, we’ll slightly increase exposure to emerging markets, as they weathered April’s storm with less turbulence and continued their upward trends.

Fixed Income & Alternatives

The same economic reports that triggered down volatility in real estate also impacted fixed income assets. In April, fixed income followed U.S. equities into negative territory for the year, as both intermediate-term and long-term uptrends took a downward turn. Consequently, allocations will revert to their minimum, with exposure shifting to ultra-short-term Treasuries. Our portfolios will maintain an overweight position on the short end of duration, steering clear of longer-duration instruments.

After enjoying a sustained rally in April, gold remains one of the star performers in our portfolios so far in 2024. Trends continue to point upwards as the month draws to a close, prompting us to keep exposure unchanged at its maximum allocation.

Sourcing for this section:
Barchart.com, S&P 500 Index ($SPX), 11/1/2023 to 4/29/2024; Barchart.com, Smallcap ETF Vanguard (VB), 1/1/2024 to 4/29/2024; and Barchart.com, Gold Trust Ishares (IAU), 1/1/2024 to 4/29/2024

3 Potential Catalysts for Trend Changes


Inflation Ignition: The Fed’s Rate Race

Robust inflation data during the first quarter has raised questions about the Federal Reserve’s ability to lower interest rates this year. Jerome Powell’s recent remarks reflect this uncertainty, indicating a longer timeline to achieve desired confidence levels. Economists predict core inflation to surpass 3% by the end of 2024, up from 2.8% in March, potentially exceeding the Fed’s 2% target. Powell’s dovish tone in December 2023, coupled with discussions within the Federal Open Markets Committee about conditions for rate cuts, underscore the challenges ahead.


Mortgage Mayhem: Housing Headwinds

Mortgage rates have surged past 7%, leading to a slowdown in home sales in March, marking the largest monthly drop in over a year. This trend compounds existing pressures on the U.S. housing market, fueled by confusion over real estate commissions. According to Freddie Mac, the average rate for a 30-year fixed mortgage has spiked to 7.1%, the highest level since late 2023. This sudden increase in borrowing costs threatens to push affordability to new lows, particularly as home prices hover near record highs and ancillary expenses such as insurance premiums and property taxes continue to rise.


Contract Controversy: Job Jitters

The Federal Trade Commission has banned employers from using non-compete contracts for most workers. These were typically used by companies to prevent workers from joining rival firms. The new ban is already facing legal challenges from business groups, and the court decisions could have widespread implications, as the practice has grown more prevalent in the U.S. economy and now affects one in five American workers.

Sourcing for this section:
The Wall Street Journal, “Powell Dials Back Expectations on Rate Cuts,” 4/16/2024; Bloomberg, “What 60,000 Headlines Say About the Fed’s Next Move,” 4/28/2024; The Wall Street Journal, “Housing Market Slumps as Mortgage Rates Top 7%,” 4/18/2024; and The Wall Street Journal, “FTC Bans Noncompete Agreements That Restrict Job Switching,” 4/23/2024

Even in Years with Above-Average Performance, Equity Markets Usually Have Points of Decline

“That’s the beauty of discipline. It trumps everything.” –David Goggins

Even in the best of years, equity markets experience negative monthly returns. In fact, if you go back to 2000, there is only one year when the S&P 500 Index rose in all 12 months: 2017. This means that even in years of above-average performance — such as 2023, 2021, 2020, 2019, 2013, 2009, and so on — equity markets usually fall. In fact, it is common to see 5% monthly declines or more.

Since the inception of the SPDR S&P 500 ETF Trust in 1993, it has experienced a monthly decline of 5% or more 36 times. That averages out to more than one per year. A quick glance at the list of those years with above-average performance years shows they are not exempt from this occurrence either.

Over the years, one of the central tenets of our A Systematic Walk Down Wall Street blog and these Monthly Notes has been to comment on studies that document average investor performance versus the S&P 500 Index. These studies show that investors tend to underperform versus a simple strategy of buying-and-holding a passive index — and by wide margins. There are many possible explanations. A big one, in our opinion, is investors’ inability to decipher between times to hold and times to run.

To counteract this tendency, we turn to the principles of trend following, which we think offer a more rational, systematic approach.

We believe one of the biggest benefits of trend following is its ability to influence investor behavior by applying a disciplined, repeatable process. Let’s explore what we mean.

Good behavior is generally understood as making the right decision among various choices, but as Charlie Munger would say, “Invert, always invert!” Inverting this thought would be saying that good behavior is making right decisions, but also avoiding wrong ones. We think a major benefit of being good at avoiding potentially stupid decisions is that it is arguably easier to achieve and more repeatable than the reverse, trying to be smarter than everyone else.

From our research, selling when a market is in a long-term uptrend but declines a few percentage points is usually a bad decision. Thus, in today’s market, following our rules and staying overweight in equities creates what we believe is good behavior that can benefit our clients. Doing so over and over means we can target performing well over many years, seeking to do so without having to play catch-up or endure the stress of falling way behind.

A sibling (or maybe close cousin…) to behavior is discipline. If behavior is making right decisions and avoiding dumb ones, then discipline is the ability to do that repeatedly in the face of stress, doubt, and outside pressure. We agree with the sentiment captured in the quote above from former Navy Seal and ultramarathoner David Goggins: discipline trumps everything. We think that if you’re following even a subpar investing process, discipline is what fosters compounding, which simply needs time to produce potentially great results. No brilliance necessary.

In our experience, investors often overthink the need to time entries and exits perfectly. They are constantly living in fear of a bear market and looking for reasons to trim exposure or exit when they should be adding to positions. Likewise (though less often), they may look for reasons to buy when they should be reducing or heading to safety. If there is anything we are confident of, it is that the timing matters far less than broadly sticking with uptrends, avoiding downtrends, and doing it consistently.

Sourcing for this section:
ICE, SPDR S&P 500 ETF Trust (SPY), 1/29/1993 to 4/29/2024

Important Disclosures

Strategic Advisory Partners is an investment advisor registered pursuant to the laws of the state of North Carolina. Our firm only conducts business in states where licensed, registered, or where an applicable exemption or exclusion is afforded. This material should not be considered a solicitation to buy or an offer to sell securities or financial services. The investment advisory services of Strategic Advisory Partners are not available in those states where our firm is not authorized or permitted by law to solicit or sell advisory services and products. Registration as an investment adviser does not imply any level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. For more information, please visit adviserinfo.sec.gov and search for our firm name.

Past performance is not indicative of future results. The material above has been provided for informational purposes only and is not intended as legal or investment advice or a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation.
Information obtained from third-party sources is believed to be reliable though its accuracy is not guaranteed.

Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of writing and are subject to change without notice. The above commentary is for informational purposes only. Not intended as legal or investment advice or a recommendation of any particular security or strategy.

No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission from Strategic Advisory Partners.

An index is an unmanaged portfolio of specific securities, the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Investors cannot invest directly in an index. An index does not charge management fees or brokerage expenses, and no such fees or expenses were deducted from the performance shown.
S&P 500 Index: A widely used U.S. equity benchmark. It contains 500 U.S. stocks chosen for market size, liquidity, and industry group representation.

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