In the most recent market commentary, I reiterated the view that the final phase of this correction was due to start in May and events in early May might serve as external triggers. Reality again strains the limits of patience: market-friendly outcomes from the the FOMC meeting and French election propelled S&P above the March 1st high before the “constitutional crisis” surrounding Trump’s firing of the FBI director James Comey precipitated a one-day 43-S&P-points drop on Wednesday. There was a lack of follow-through however. Although I still believe there will be a final drop, I’m not sure if even 2320 on the S&P is “in play” at this point.
One may rightly ask why the correction has been much shallower than anticipated. It’s easy to come up with conspiracy theories where the Central Bank or the plunge-protection-team (PPT) surreptitiously support the market to accomplish their policy objectives. It may be true, but this is one area where I consciously decide not to have an opinion. Not “I don’t know” but “I don’t want to know” — an intentional burying-head-in-the-sand that not everyone is willing to do. Besides deliberate intervention, it’s possible that there are enough other market participants also poised to buy the dip, or the stream of passive buy-no-matter-what crowd is so overwhelming. The question itself is misplaced, it’s not about why but is. The only conclusion to be drawn is that when something refuses to go down it will go up with a vengeance. Anything else is an opinion, ideology even, that I can’t afford.
Throughout this month, I have been steadily deploying cash into the buy-list, but there is still some ways to go. I have also been looking at the asset allocation in the passive accounts. My current plan is to further increase the equity allocation by another 5%. For reference, the current AA is 50% equities/35% FI/15% PM, I’ll move into the AA under the “Aggressive” heading below, shifting out of FI.
The composition of the subclasses are limited by access to funds rather than from any quantitative analysis. I can only access EM, and REITs in my Roth IRA accounts while the LB, SB and total international from HSA and 401K that see regular contributions. So they end up taking all of the increases. The overall portfolio will be at 55-60% equities by the end of the summer. This is at least 10 percentage points higher than my baseline allocation were there not the belief that we’re in the final bubble phase of this bull market. For reference, I also outlined what a “defensive” AA would look like. Keeping the PM allocation constant at 15%, there is a 15% overall shift between equities/FI. The composition of the subclasses is also different as the emphasis is to reduce risk and take advantage of the negative correlation offered by treasuries. Of course a new plan will be needed if the next crisis is triggered by a flee from US government bonds. I still see a likely transitioning into the “defensive” AA in Q3’18.