Latest posts by Wanderer (see all)
- The Yield Shield: Putting it all Together - April 16, 2018
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Hello again and welcome back to the Millennial Revolution Investment Workshop! New readers, please click here to start from the beginning.
Hello everyone and Merry almost-Christmas!
It’s been about 5 weeks since we started building our workshop portfolio, and that means that some of the graphs and reports in Personal Capital have enough history now to actually have some meaning. So let’s check in with them, shall we?
Before we do, though, let’s review what the purpose of our portfolio is supposed to be. A 60/40 portfolio of low-cost Index ETFs is designed to do 2 things:
- Dampen the day-to-day swings of the stock market
- Provide steady long-term growth
And while 30 days is not exactly enough time to see “long-term growth,” let’s see how the portfolio is doing at dampening the day-to-day swings of the stock market. And for that, we will log into Personal Capital and click “Portfolio -> Holdings”.
This brings up a view called the “You Index,” which takes our holdings and graphs the asset allocation against various indexes like the S&P 500, Dow Jones, etc.
Here’s our portfolio’s “You Index” view.
Pretty boring, right? Well, in case you haven’t been glued to the news like I have over the past month, the actual markets have been anything but.
Here’s what the bond market’s been doing.
Boom. Bond market down.
This past week, the Federal Reserve (the US central bank) had a BIG announcement: Interest rates are going up. In a unanimous decision by the Federal Open Market Committee (or FOMC, as the cool kids call it) voted to raise the target Federal Funds interest rate from 0.5% to 0.75%. That wasn’t unexpected. As this Business Insider article points out, bond traders had set a 100% probability that the Fed would do this, which means they had already priced that outcome into the bond market. What WASN’T expected, though, was the simultaneous announcement that the Fed would continue with 3 more interest rate hikes, meaning we are going to see interest rates go up a full percentage point at some point in the near future.
And when interest rates go up, Bond ETFs like the one we own go down. So down she went.
Now let’s see what the Canadian stock market did.
Canada up. Whaaaa?
Up here in Canada, our stock market is widely seen as a commodities market. We make other things (maple syrup, Justin Bieber, PM selfies, etc.) but global stock traders treat us mostly as a lumber, mining, and oil-producing nation. So when the price of one of those commodities moves in a major way, our stock market goes with it. So what moved?
Oil has been the biggest commodities news story of the past year. Remember $100-a-barrel oil? Remember how that fell into the $30s at the beginning of 2016? Yeah, that shit wasn’t fun for our stock market.
And all of that was directly caused by OPEC. Annoyed at the Americans’ efforts to produce oil themselves rather than buying it from the Saudis, OPEC has been pumping cheap oil into the global commodities markets in an effort to bankrupt US oil companies. They figured: Make oil dirt cheap so those companies go under. Then when Saudi oil is the only game in town they can jack the price back up.
Well, I appreciate the Machiavellian nature of their plan, but unfortunately for them, it didn’t work. Those US oil companies, having learned how to survive such shenanigans in the past, survived and this oil price manipulation didn’t have the effect that OPEC wanted. What did get whacked in the process, however, was oil producing nations like Canada. Our stock market plummeted 12% at the beginning of 2016. And ask REALLY oil-dependent nations like Venezuela how things are doing. Spoiler alert: Not super.
But all that seems to have changed recently as OPEC announced production cuts in a meeting last month. That means they’re abandoning their make-oil-cheap-as-hell strategy, which means oil prices are going up again (it crossed $50 a barrel recently), which means Canada benefits. So that’s what’s happening here.
Now, how about the US indexes? How are they doing?
OK, what the Hell, US markets? You spent all last year jabbering about how Trump would blow up the financial world, then you go UP after that idiot got elected?
So what seems to have happened is that, like most of us, they dismissed the idea of a Trump presidency through most of the year. But when it actually happened, they sat down and thought about what that would actually mean and realized that it might not be so bad.
Don’t get me wrong. For actual Americans on the ground, a Trump presidency is terrible. He’s promised to appoint socially conservative supreme court justices, meaning that in all likelihood, abortion rights and the LGBTQIA community are going to come under attack, his environmental policies are planted firmly in the “screw it!” camp, and he’s about to repeal Obamacare without that pesky “replace” part. That’s all very very bad.
But to a stock trader, does it affect stock markets? Not really. In fact, his promise to cut corporate taxes in half would have a net positive effect on business profitability. So it looks like what happened here was after that brief “Oh shit!” period we all experienced watching the election results come in, Wall Street has decided that while Trump may be bad for Americans, he’s good for the American Index. We’ll see whether they turn out to be right about that after he takes office.
And finally International markets. Here’s the EAFE:
EAFE is up. Similar to Trump, Europe’s been reeling from the Brexit vote and the wave of Trump-like populist sentiment sweeping over the continent, and has made a similar conclusion of “Bad for Europeans, maybe OK for European stock markets.” Time will tell whether they’re proven right.
And here’s Emerging Markets:
So Emerging Markets is the stable one?!? Ugh, whatever.
What Does It All Mean?
And throughout it all, I predicted precisely NONE of these events. Especially the Trump-being-good-for-markets thing. And despite what all the talking heads on Mad Money will tell you, THEY predicted precisely none of these events too! That’s why we don’t try to trade on what’s going on in the news. Nobody has any bloody idea what’s going to happen.
But because we just picked a globally balanced asset allocation and stuck with it, how did our actual portfolio behave? For that, we just need to click on over to the “Performance” tab in our Personal Capital view.
Steady and slightly up. Super. And that’s the effect of picking an asset allocation like we did. Because we didn’t go 100% stocks or 100% bonds, we didn’t get pulled in one direction too strongly by any one news story, and overall we just kinda floated along. If you were to just track the day-to-day performance of our portfolio, you’d think nothing was going on in the world, when in reality the opposite was true.
And our American portfolio is behaving about the same as well. Here it is:
Snooze. And that’s a good thing.
OK then, that’s it for this week. Have a great Holidays everyone! We will talk again after the Christmas break. Eat lots of turkey!
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Disclaimer: The views expressed is provided as a general source of information only and should not be considered to be personal investment advice or solicitation to buy or sell securities. Investors considering any investment should consult with their investment advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decisions. The information contained in this blog was obtained from sources believe to be reliable, however, we cannot represent that it is accurate or complete.
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