Fixed Income Under the Microscope

December 27, 2016

Earlier this month we saw a noteworthy shift in DALI, which ranks six asset classes by relative strength from strongest to weakest.  Fixed Income came into 2016 ranked number two in DALI and spent much of the first half of the year ranked number one.

dali-ranks

As of 12/22/16

As shown below, Fixed Income fell to the fourth rank in the middle of this month after having been ranked three or higher since early 2012.

fixed-income-rank-in-dali

Period: 1/3/07 – 12/19/16, based on weekly tally ranking

Bonds are typically the portion of the allocation that investors worry least about, especially over the past 35 years.  Fixed Income tends to have lower volatility than most other asset classes and if you just look at the nominal returns of bonds over time, you would probably be reassured.  After all, as shown in the first table below, nominal Fixed Income returns have been positive in every single decade since the 1870s.  In the tables below, losing performances are shaded in red, those with annualized gains of 0% to 1.9% in yellow, and left unshaded are any gains of 2% or higher.

morningstar-1

Source: Morningstar, Research Affiliates

However, real annualized returns show a very different story.  After accounting for inflation, bonds have not always been so stellar.

morningstar-2

Source: Morningstar, Research Affiliates

What action should be taken if fixed income were to enter into another extended period where its real returns weren’t so favorable?  That will depend on each client’s circumstances, but DALI will be a good way to gauge the overall environment for this very important asset class.

The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value. 

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Steve Forbes Interviews Tom Dorsey

December 27, 2016

Steve Forbes Interviews Tom Dorsey, Founder, Dorsey, Wright & Associates

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Weekly RS Recap

December 27, 2016

The table below shows the performance of a universe of mid and large cap U.S. equities, broken down by relative strength decile and quartile and then compared to the universe return.  Those at the top of the ranks are those stocks which have the best intermediate-term relative strength.  Relative strength strategies buy securities that have strong intermediate-term relative strength and hold them as long as they remain strong.

Last week’s performance (12/19/16 – 12/23/16) is as follows:

ranks

This example is presented for illustrative purposes only and does not represent a past or present recommendation.  The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  The performance above is based on pure price returns, not inclusive of dividends, fees, or other expenses.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.

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