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September 2020 | Portfolio Update

Dear Spartan Client,


Below are the main asset classes utilized in Spartan portfolios and their model-driven exposure heading into September.


At a Glance: Allocation Adjustments heading into September, 2020


  • U.S. Equities: No change from last month. Our portfolios remain overweight, as there are uptrends across the intermediate and long term.

  • International Equities: No change to exposure, which is at its baseline allocation, with uptrends remaining across all timeframes.

  • Real Estate: No change. We are at the minimum allocation due to continued downtrends in all timeframes.

  • Intermediate-Term Fixed Income: No change from last month. Remains in uptrends across all timeframes for U.S. and international bonds.

  • TIPS: No change to exposure, which is at its baseline allocation, with uptrends remaining across all timeframes.

  • Short-Term Notes and Cash Equivalents: No change to exposure, with uptrends across all timeframes.

  • Hedge Strategies: No change from baseline exposure, with uptrends across all timeframes.

Asset Level Overview

Equities and Real Estate

After sustaining uptrends since Q2, U.S. large-cap equities managed to push into positive territory for the year, making new highs and officially erasing the "Coronacrash" drawdown. However, U.S. mid and small-cap equities, as well as international equity sectors, continue to lag and have not been able to break above pre-COVID levels. U.S. large caps have taken on a V-shape; small, mid, and international equities have taken a U-shape configuration; and real estate continues to look more “L-ish.” The result of this price action is a slightly overweight allocation to U.S. equities, target allocations in international equities, and a minimum allocation to real estate.


Fixed Income

Uptrends have been sustained in both U.S and international fixed income. Heading into September, the overall allocation will be unchanged for fixed income, continuing with a slightly overweight concentration on mid to lower duration instruments.


Three potential macro catalysts for the recent trend changes:


  • S&P 500 Makes New All-Time Highs: The S&P 500 Index hit record intraday and closing highs on August 18. According to Barron’s, this marked the fastest recovery (126 days) from a bear market in history; less than 1/10th the time of the index’s average historical rebound (1,542 trading days).

  • Improving (relative) U.S. Economic Data: August housing data showed healthy increases in both housing starts and permits in July. The National Association of Home Builders’ measure of builder confidence also reached its highest point on record, and existing home sales in July rose much more than expected, hitting their greatest level since December 2006. Additionally, the number of continued unemployment claims fell more than expected and hit its lowest number (14.8 million) since early April. This is a great clawback of job losses, but it is important to note that with an average unemployment rate of 3.7% for all of 2019, the current 10.2% rate from July 2020 is still far from great.

  • Improving U.S.-China Trade Tensions: Chinese stocks ended slightly higher, as President Trump’s postponement of a six-month trade review reduced concerns about deteriorating U.S. - China ties. Longer-term, the Trump administration’s actions to restrict the access of Chinese companies to U.S. semiconductor technology could remain a source of tension, spurring Beijing to foster its domestic technology capabilities.


How Weird Is It?


You know what’s weird? Day by day, nothing seems to change, but pretty soon…everything’s different.”

– Bill Watterson, American Cartoonist


In last month’s commentary, we pointed out the “weird” anomalies occurring in markets this year: from large divergences between growth and value factors to poor performance in perceived “safe” stocks compared to “less safe” stocks, and of course, Warren Buffet. As a team made up of curious and sometimes-tastefully-irreverent individuals, the next logical question was, “OK, how weird is it?”


To attack this question, we looked at the 101 holdings that comprise the S&P 100 (speaking of weird…) for clues. Our first point of attack was to look at the distribution of annual returns for each underlying holding in the index. Among other things, we were looking for a large discrepancy in the shape or skew of the distribution over the chosen sample period. Below is the distribution of those annual returns since 2018, with the number of stocks in each return group annotated for detail in 2020.



The last three years have given us a very diverse sample to work from. Each has been distinct from the other, apart from the down volatility experienced in both Q4 of 2018 and the Coronacrash of Q1 2020. In the graph, we can see the distribution of returns is much flatter in 2020 than in previous years. Moreover, 2020 has the largest number of extremely negative performers on the left side of the graph.


Next, we further broke down the average and median returns for each underlying holding. Doing so yielded the insight that only a few positive outliers have driven performance. As you can see in the graph below, while the index is up just over 11% for the year, the average return for the underlying stocks in the S&P 100 is 0.08%, with the median return at -3.22%. Given the lower than average median return is lower than the average, it is interesting to note that while every stock has a 50% chance of being above the median, each individual stock has a much lower than 50% chance of being above average. This is consistent with our longer-term research as well.



Further, when we analyzed the ten best and worst performers year-to-date, the significant impact of each end of the distribution became clear. The table below shows the ten best and worst index constituents, year-to-date.



The average return of the ten best holdings is 60.7% versus -47.7% for the ten worst. That gap of 108% (percentage points, not the change!) is the largest average experienced between the ten best and worst performers since the Global Financial Crisis.


We have also included in this table a statistic, “% of YTD Trend Following Model Would Have Been Invested,” which takes our trend following strategies and applies the approach, hypothetically, to each respective stock. While in this case serving as an illustration only, this is an area we have researched and tested considerably over the past 18 months. The data makes an overwhelming case to use individual stocks rather than the index, where possible, assuming you have a systematic, loss-limiting mechanism like a trend following strategy. More to come on that topic in future notes.


So, where does that leave us? The data shows that this year is indeed weird (as if you didn’t know that already), at least when focusing on U.S. large-cap equities. What is so striking is the disparity in returns between individual issues and sectors as a whole. What is becoming apparent from our research is that the index return is primarily driven by positive outliers in “good” years and more of a clustering effect in “bad” years.


Data like this continually reaffirms our desire to be different, especially in downtimes. This harkens back to the age-old adage concerning following the crowd, “if all your friends jumped off a bridge, would you?” Our answer is always NO! When managing risk for your financial life, we do not believe you have to follow the same path as everyone else. The herd mentality of the market shows us when we should follow, and more importantly when we should stop following.



Please feel free to call or email us for additional details. We would be happy to discuss our take on the current environment with you in greater detail.



Best,

David Childs, Ira Ross, Blaise Stevens, and Eric Warren

Spartan Planning



Disclaimer: this note is for general update purposes related to the strategy and approach of Spartan Planning portfolios. Every client's situation including Risk Profile, Time Horizon, Contributions, and Distributions is different from other clients. Your particular exposure to any given asset class will depend on your goals, risk profile, and how tactical or passive your risk profile calls for. If there have been changes to your risk profile and/or goals or if you wish to discuss them in more depth please contact your advisor. This email and the data herein is not a solicitation to invest in any investment product nor is it intended to provide investment advice. It is intended for information purposes only and should be used by investment professionals and investors who are knowledgeable of the risks involved. No representation is made that any investment will or is likely to achieve results comparable to those shown or will make any profit at all or will be able to avoid incurring substantial losses. While every effort has been made to provide data from sources considered to be reliable, no guarantee of accuracy is given. Historical data are presented for informational purposes only. Investment programs described herein contain significant risks. A secondary market may not exist or develop for some investments portrayed. Past performance is not indicative of future performance. Investment decisions should be made based on the investor's specific financial needs and objectives, goals, time horizon, tax liability, risk tolerance, and other relevant factors. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Investors should consider the underlying funds’ investment objectives, risks, charges, and expenses carefully before investing. The Advisor’s ADV, which contains this and other important information, should be read carefully before investing. ETFs trade like stocks and may trade for less than their net asset value. Spartan Planning Group, LLC (“Spartan” or the “Advisor”) is registered as an investment adviser with the United States Securities and Exchange Commission (SEC). Registration does not constitute an endorsement of the firm by the SEC nor does it indicate that the Adviser has attained a particular level of skill or ability. Indexes are unmanaged and do not incur management fees, costs, and expenses. Spartan’s risk-management process includes an effort to monitor and manage risk, but should not be confused with and does not imply low risk or the ability to control risk. There are risks associated with any investment approach, and Spartan strategies have their own set of risks to be aware of. First, there are the risks associated with the long-term static holdings for each of the strategies. The more aggressive the Spartan strategy selected, the more likely the strategy will contain larger weights in riskier asset classes, such as equities. Second, there are distinct risks associated with Spartan Strategies’ shorter-term tactical allocations, which can result in more concentration towards a certain asset class or classes. This introduces the risk that Spartan could be on the wrong side of a tactical overweight, thus resulting in a drag on overall performance or loss of principal. International investments may involve additional risks, which could include differences in financial accounting standards, currency fluctuations, political instability, foreign taxes and regulations, and the potential for illiquid markets. Investing in emerging markets may accentuate these risks. Diversification strategies do not ensure a profit and do not protect against losses in declining markets

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