Current Positions:
High Conviction Tactical Models*1:
Developed International Stocks: 100% Cash Instruments
High Yield Bonds: 100% High Yield Bonds
US Stocks: 100% Invested
Investment Grade Bonds: 100% Treasuries and Cash Equivalents
Equity Portion of Defensive Alpha Models*:
70% Bullish Posture†
Recent Trades
One week ago today, our algos finished moving to an invested position for our High Yield Bonds allocations across our models. After this move, high yield bonds have continued to advance this week, delivering gains for these allocations.
On Monday we began allocating US stock positions back to a bullish posture, and completed that trade today. Coming into the new week, these positions will be fully invested.
Our International Developed Stocks remain defensive.
Use this Rally to Add Hedged Strategies
After finishing the worst half of a year for stocks since the 1960’s, risk assets have meandered higher, gaining momentum after the Federal Reserve’s Statement on Wednesday. Yesterday, markets cheered the report showing that 2nd quarter GDP sagged by .9% in the second quarter, following a 1.6% contraction in Q1. Declining GDP suggests that the FED rate increases are succeeding in slowing down a hot economy and easing pressures on inflation. And indeed, some commodities have seen prices ebb over the past weeks.
Many headlines ask “Has Inflation Peaked?” This question frames inflation as a phenomenon that briefly surges and then returns to normal levels. Unfortunately that’s not been the historical path that inflations follows. Instead, the past three episodes of high inflation have endured from 5 to 8 years. The focus of the marketplace should instead address the question: “How long will inflation persist at elevated levels,” and related “what will be the impact on financial assets, if the FED continues to raise rates.”
An additional and crucially important question for investors is the impact of a declining economy on earnings and stock multiples. Recall as stocks fell during the past two significant bear markets (Internet bubble, financial crisis), the FED was lowering rates aggressively as markets fell, not raising rates.
Our only conclusion is that, despite some promising recent gains, markets face challenges ahead. We’re happy to be invested in US Stocks and high yield bonds, but have no illusions about market challenges over the coming months.
Our strongest advice is to use this opportunity to address the contingency of additional market turmoil ahead. For stocks, maintain 50% in hedged strategies. For bonds, leave conventional fixed income and look to tactical strategies that can be agile in a rising rate environment.
We’ll update you with any additional trades ahead.
Toews Management Team
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(1)These include the Toews Capital Preservation, Balanced, Balanced Income, Balanced Growth, Growth, and All Equity, High Income, Balanced Income, and Conservative Income portfolios. They do not reflect the allocations of these strategies that are not allocated to Toews Funds.
(*)Exposure to vehicles invested in the listed asset classes
(†)Approximate Defensive Allocation