June 9, 2021
Good morning,
Last week we presented a 15-month chart of the S&P 500 pointing out that the index’s climb rate had slowed considerably as of its first anniversary. A perfectly normal 2nd year of a bull market development, historically. For the days since then, that sideways trend has only intensified, which is to say; volumes have declined, volatility is down (to pre-pandemic levels I might add), and indexes have gone nowhere. Is this a market pause that refreshes or the makings of a top? We don’t know yet. For taxable accounts where risk-off selling has meaningful capital preservation implications (cap gain taxes), there needs to be more evidence to make risk-off changes and the Tape still leans bullish and Fed accommodative.
For non-taxable accounts where portfolio changes are not tax constrained, less evidence is necessary to make defensive moves. For months now, with raging equity momentum, fixed income has been abandoned in non-taxable accounts. The extent of the momentum for the first year of the current bull market was strong enough to accept the risk of 100% equity in multi-asset non-taxable portfolios. That all changed this week. Momentum has gone away for now. That does not mean correction or top, necessarily. However, the loss of market momentum does mean that the risk of over-weighting equity has grown and it’s now time to rebalance back to the long term strategic allocation (70% equity / 30% fixed income for example).
If today’s note is too wonky, or brings up any concerns for you, call or email me and I’ll do a better job at explaining. That would truly be my pleasure.
Be well,
Mike