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On Friday, November 2, 2018, BWM Financial reduced equity investments across each of our clients’ managed portfolios. The resulting allocations own less than their benchmark in stocks for the first time since 2009.
The change comes on the heels of our recent reduction to equity investments because of extended valuations, increased geopolitical risks, and mixed readings in several important tactical indicators.
This week brought mounting evidence in favor of further reductions to stock investments. A relief rally in the U.S. afforded us the ability to sell U.S. stocks into relative strength after a volatile month of October.
Bearish readings of important tactical indicators from Ned Davis Research support our more cautious stance.
First, NDR’s Bear Market Watch Report (chart below) is now showing that 40% of its key measures are in bearish territory. While it is not yet crossed the 40% threshold, just one more indicator to change will be consistent with further downside risk. Further defensive measures could follow, if a more decisive breakdown occurs.
In addition, NDR’s Global Recession Probability Model (chart below) crossed above 80%. That’s consistent with other global economic slowdowns and cyclical bear markets seen in 2011 and 2015-16.
Accordingly, NDR’s Global Balanced Account Model (chart below) is now recommending the lowest equity allocation since early 2016. This model reflects a composite of indicators combined to generate what it believes to be the optimal portfolio weightings for stocks, bonds, and cash given the current macro and market environment.
To summarize, we are reducing our equity allocation to “underweight” due to bearish readings on key tactical indicators. Evidence of market capitulation and lower valuations would be needed before a market bottom can be put in place. Until then, a defensive allocation is advisable.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.
All indices are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. Past performance is no guarantee of future results.
