The Markets Are Looking Ahead

A lot changed after the Con- sumer Price Index (CPI) began sliding last spring, and those changes helped our portfolios. Since the June CPI data was re- leased, the equal-weighted S&P 500 Index and smaller company stocks have outperformed the S&P 500 In- dex, growth stocks and large compa- ny stocks. That’s a sharp reversal of the trends of recent years. But it seemed likely to happen at some point, given the his- toric disparity in the returns of those groups in recent years. In anticipation, we added Invesco S&P 500 Equal-Weight (RSP) to the portfolios in February 2024.

As its name says, the ETF invests a roughly equal amount in each of the stocks in the S&P 500, rebalancing the holdings periodically. Recently, the largest holding (United Airlines) was 0.33% of the fund. Most stocks were 0.22% of the fund. The top 10 positions total only 3% of the ETF compared to 36% of the capi- talization-weighted S&P 500 Index.

Over the very long term, the equal-weighted S&P 500 Index has a total return equal to or exceeding that of the capitalization-weighted index. But in the last 10 years or so, the capi- talization-weighted index handily beat the equal-weighted version. RSP is up 3.66% over the last four weeks, 11.14% over three months, 18.08% for the year to date, and 33.31% over the last 12 months.

Since I was expecting the bull market to broaden beyond the 10 or fewer stocks that have dominated market returns in recent years, we also added an ETF of smaller company stocks. Over the last 15 years or so, the return gap between large company stocks and smaller company stocks reached historic levels. That wasn’t likely to be sustained, so smaller com- pany stocks were due to recover some of that ground. In recent months, smaller company stocks have been leading the markets.

They should continue that perfor- mance unless interest rates rise too much or economic growth falters. I’ve recommended iShares Russell 2000 (IWM), though there are other good small stock ETFs. The fund invests equal amounts in each stock in the index and rebalances the holdings periodically. The largest position (FTAI Aviation) recently was 0.52% of the fund. Most holdings are 0.20% of the fund or less. IWM increased 9.44% over the last four weeks, 15.49% over three months, 19.68% so far in 2024 and 41.94% over 12 months. By comparison, the SPDR S&P 500 Trust (SPY) increased 4.37% in the last four weeks, 13.07% over three months, 27.04% for the year to date and 38.66% over 12 months.

We also invest in U.S. stocks through Leuthold Core Investment (LCORX). In this tactically managed mutual fund, the managers adjust the holdings after consulting readings from mo- mentum and valuation measures that the fund has been using for decades. The fund is able to either own or sell short any publicly traded asset in the world. In addition, it isn’t restricted to indexes or other broad asset groups. For example, in the U.S. stock mar- ket, the fund can own stocks or sectors that are attractive, based on the mea- sures the managers use. LCORX can avoid or sell short other stocks or sec- tors.

So, its U.S. stock allocation doesn’t always mirror the major indexes. LCORX has been neutral on U.S. stocks for most of the last 18 months and neutral or negative on most other investments. The fund hasn’t changed its positions much over that time. About 62% of the fund recently was in U.S. stocks, and that was balanced by hedging positions making up 14% of the fund. Another 7% was in stocks traded in developed foreign markets. The rest of the fund was spread among different fixed in- come investments. LCORX was up 2.49% in the last four weeks, 6.15% over three months, 12.25% for the year to date and 18.74% over 12 months.

We also invested in Boston Partners Global Long/Short (BGRSX), which owns some stocks while selling short others. We earned solid returns with the fund. Unfortunately, the fund is now owned by John Hancock and isn’t available to most of my readers through their preferred brokers and accounts.

I still favor having a long/short fund at this point, so I’m recommending the ETF First Trust Long/Short Equity (FTLS). The ETF usually is 80% to 100% in- vested in long positions and 0% to 50% in short positions. The positions are more than 100% of the fund because the short positions involve leverage. The managers use public and pro- prietary data and systems to identify the stocks they buy and sell short. They use additional tools to control the risk, making sure the portfolio doesn’t have too much exposure to a particular sec- tor or other investment factor. The risk management process also balances the combined risk of the long and short positions. FTLS is up 3.84% in the last four weeks, 7.32% over three months, 17.98% for the year to date and 23.00% over 12 months.

Real estate investment trusts (REITs) were hammered in the pandemic, recovered briefly and tumbled again after the Fed began raising interest rates in 2022. They began to rally in April 2024 and really took off over the summer. REITs declined a bit the last couple months, but the rally should resume. Publicly traded real estate securities sell at substantial discounts to privately owned properties, and REITs should benefit from continued economic growth. I recommend Cohen & Steers Realty Shares (CSRSX) because the managers don’t track an index, and they concentrate on the REITs they think are the most attractive.

After developing an economic out- look, the CSRSX managers determine which REIT sectors will fare best in that environment. The fund buys the highest-quality REITs in those sec- tors, provided they sell at reasonable prices. In recent years, the fund downplayed office buildings, shopping malls and other troubled sectors in favor of apartments, cell towers, data centers and others. Recently, the top sectors in the fund were telecommunications, health care, data centers, industrial and apart- ments. Top holdings were American Tower, Welltower, Digital Realty Trust, Crown Castle and Prologis. The fund held 35 securities and 59% of the fund was in its 10 largest positions. CSRSX is up 1.17% in the last four weeks, 5.22% over three months, 13.79% for the year to date and 31.79% over 12 months.

Taiwan’s stock market continues to surge, powered by Taiwan Semicon- ductor Manufacturing Corporation and the massive global investments in artificial intelligence, as shown in the performance of iShares MSCI Taiwan (EWT). The fund tracks the MSCI Taiwan Index and recently held 94 securities with 48% of the fund in the 10 largest positions. Taiwan Semiconductor is more than 23% of the fund, and the technology sector is almost 64%. EWT increased 3.04% in the last four weeks, 10.11% over three months, 21.64% so far in 2024 and 38.26% over 12 months. India’s stocks lagged the last couple of months after a strong 18 months that began in early 2023.

Recent corporate earnings didn’t meet expec- tations, and investors are assessing how the U.S. election will affect com- panies in India. The longer-term case for India is that its economy maintains a high growth rate and is benefitting from global businesses that want their manufactur- ing and production less dependent on China. India does have structural and political issues.

But the government has adopted more shareholder-friendly policies and is taking other steps to open the economy to foreign invest- ment and increase economic growth. PIN tracks an index that recently had 203 securities. The 10 largest posi- tions were 36% of the fund, including well-known global companies such as Reliance Industries, Infosys and Tata Consultancy. The fund lost 4.66% in the last four weeks and 2.55% over three months. It is up 11.80% for the year to date and 24.91% over 12 months.

Preferred securities finally saw a price decline in the last month, but indications are that it is temporary. I like the closed-end fund Cohen & Steers Limited Duration Preferred & Income Securities (LDP) because the managers don’t try to track an index. They examine each securi- ty issuer and make preservation of capital a priority. They also invest globally instead of being tied to only U.S. securities. The discount to net asset value on the fund shrank recently, expanded, and shrank again.

The latest discount was 2.30%, and the six-month aver- age discount is 5.93%. The fund uses leverage, having a recent leverage ratio of about 33%. LDP declined 0.18% in the last four weeks. It is up 11.75% over three months, 25.28% so far in 2024 and 34.34% over 12 months. The distribu- tion yield recently was 7.27%.

Gold continues its bull market, ral- lying to a series of new highs in 2024. Purchases by a number of central banks around the world are a major force behind the surge. The central banks are seeking to diversify their reserves to limit concentration in the dollar. Global conflicts also increase gold buying, and consumer purchases in China and India appear to have increased.

The perpetual budget deficits in the United States are another support for gold, because more investors worry that at some point they will lead to higher inflation and a decline in the dollar. I recommend buying through iShares Gold Trust (IAU), which gained 2.34% in the last four weeks, 10.77% over three months, 29.90% for the year to date and 37.40% over 12 months.

Our managed futures strategy in KraneShares Mount Lucas Managed Futures Index Strategy (KMLM) has largely been in a trading range in 2024 with a bias to the downside. That should be expected. The managed futures strategy does well when there’s a lot of market volatility and when stocks are falling. It returned over 30% in 2022. The rest of the time, the ETF treads water or loses value. The fund is insur- ance against bad market events. KMLM is up 0.48% in the last four weeks. It is down 2.72% over three months, 2.65% so far in 2024 and 9.67% over 12 months. We round out the portfolios with principal-protected investments that pay solid yields.

I’ve been recommending money market funds this year. The Fed says it plans to bring its yields from the recent 5+% to below 4% and close to 3% over the next year or two. Investors who expect that to happen should move out of money market funds and lock in the current yields on multi-year guaranteed annuities or certificates of deposit. But I suspect the Fed won’t be able to reduce interest rates as much as it plans, so I still prefer money market funds. I recommend continuing to avoid bonds. After the Fed cut short-term rates, longer-term rates increased and caused losses in bonds. I expect lon- ger-term rates to rise even if the Fed brings short-term rates down.

RETIREMENT PAYCHECK

Our Retirement Paycheck portfolio has gradually moved to resemble a traditional conservative retirement income portfolio, holding mainly principal-protected investments such as money market funds, multi-year guaranteed annuities and CDs. I developed this portfolio when in- terest rates on traditional retirement investments were too low to provide enough income for most retirees. We added other investments, such as closed-end funds, preferred securi- ties, high-yield bonds and more. We also use a tactical investment strategy, buying and selling investments as their margins of safety increased or decreased.

After the Fed began raising interest rates, traditional retirement invest- ments became more attractive than the others, offering both principal protec- tion and solid income. The only investment in this portfolio that hasn’t been reviewed already is DoubleLine Emerging Markets Local Currency Bond (DLELX). The fund’s delivered solid returns since late 2022, but it’s had a volatile 2024. It is time to sell the fund. A reason to purchase it was that some emerg- ing market currencies seemed likely to appreciate against the dollar. That resulted in some gains. But the elec- tion results and policy changes that are likely to come should strengthen the dollar for a while.

For now, sell DLELX and put the proceeds in mon- ey market funds. DLELX is down 1.83% over the last four weeks and 1.25% for the year to date. It is up 0.47% over three months and 4.34% over 12 months. The yield recently was 6.18%.

TRUE DIVERSIFICATION

Our buy-and-hold portfolio, known as True Diversification, continues to deliver solid, steady returns with about half the volatility of the S&P 500. We’ll trail the major stock indexes during bull markets but make that up at other times. Most portfolios aren’t really diversified.

They have high correlations to the major stock indexes and depend on bull markets for their returns. In this portfolio, we own a collec- tion of funds that generally have low correlations with each other and with the major stock indexes.

We don’t change the portfolio often. But a change recently was forced on us. Boston Partners Long/Short Global Equity (BGRSX) was acquired by John Hancock and isn’t readily available to most of my readers. In the model portfolio, I’m moving that allocation to the ETF First Trust Long/Short Equity (FTLS).

INVEST WITH THE WINNERS

Last month, we moved this portfo- lio into Invesco QQQ Trust (QQQ). QQQ was up 5.08% in the last four weeks and 14.91% over three months. Each month, this portfolio is in ei- ther one ETF or cash. I review several models that assess a diversified group of ETFs and try to determine which one, if any, with strong recent perfor- mance is likely to continue that climb. The models say to keep the portfolio in QQQ this month.

A note about fund share classes in all the portfolios. Some readers report difficulty buying shares of some of the recommended open-end funds. These funds have different share classes, and at least one share class should be available from every major broker. Search for the fund by name instead of the ticker symbol, and you should find a low- or no-cost way to buy it.