Happy Valentine's! Monday 14FEB22
Russia/Ukraine Tensions Ease Up, Fed Meets Today, Chasing the Nasdaq is a Fool's Errand
On Monday at 11:30 EST, The Federal Reserve Board of Governors will have a closed door session to determine if they should raise rates and/or change the speed of Fed asset purchases.
The “ominous” meeting: https://www.federalreserve.gov/aboutthefed/boardmeetings/20220214closed.htm (that happens all the time)
This is a normal meeting. The Fed regularly meets behind closed-doors every-other Monday, or as possible. Wannabe internet sleuths have coalesced on the appearance of this meeting on the Fed’s calendar as an “ultra special” meeting, after which they “may hike rights intra-meeting”.
A rate-hike would go against everything the Fed has been telegraphing, and would change our perception of how the Fed operates and whether or not we are able to trust their statements. I believe that it will be very important for the Fed to maintain transparent communication with market participants.
That said, nothing is ever out of the question. I’ll be doing my usual: buying and holding, shifting assets as needed with the goal of hopping back into the S&P with full force when valuations come down to earth.
The #US2Y10YC (10y over 2y treasury) yield curve index has plummeted, with both 2 and 10y yields soaring above their pre-pandemic levels. Inflation is, clearly, here.
For all tenors/durations, the treasury curve gets a bit more complicated. We’re seeing 2-year treasuries rise the most as short-term interest rate expectations rise. On the other end, 30-year treasuries have seen a lot of buying. I suspect that much of the bid on the #US30y is from pensions. After 25 years, they are finally “funded” (able to meet their obligations). This means they merely want security for their funds, and pensions can afford a significant rate rise. They cannot afford a huge market crash.
At this point, it looks like the pension funds made the right call, as the #SPX and particularly the #NDX and growth names have gotten absolutely hammered.
Tactical Allocation: 2022
2022 has proven to be an excellent year for tactical allocation and active value funds. Selling growth and buying value has been a winning trade, and many value funds are up on the year. In fact, each value fund I recommend and have recommended is up, except for $VTV, which is down 1.1%, which we’ll just blame on Berkshire $BRK.B.
Today, I’ll be watching the news from Russia/Ukraine, looking to move funds from US-domiciled firms toward some DM/EM firms that sold off overnight as assets move toward value/ex-US and lower ratios. I think gravity is hitting the market, and price/valuation matter.
For overseas investments, a few options stand out: $EFV for EAFE Value, DFA’s EM fund, which tilts towards value, $DFAE, International Dividend Payers with $IDV and $VYMI, as well as the Avantis/DFA DM ETFs: $DFAI and $AVDE. With a wide spread, $AVIV gives access to international value, but I will be using $EFV and $IDV and mutual funds to ensure I’m not paying a 30 cents to buy a $30 ETF. (EFV and IDV have 1-cent spreads all day long, just like $VTV or $QQQ or $SPY.)
I won’t be trying to find the bottom or anything like it, I think that value, international stocks will outperform other factors, and that the growth/value spread gives us multi-year window in which to move assets toward more value or fundamental-weighted names.
I am also using $FNDX and $FNDF (Schwab’s Fundamental US and International ETFs), which weight their components buy actual fundamentals. Another favorite is the $COWZ series, for which there is a small-cap $CALF and international version, $ICOW.
For mutual fund selections, $DODFX from Dodge and Cox, $VTRIX, Vanguard’s International Value fund, and a newcomer: $VWICX from Vanguard. $VWICX remains ~+1.5% in 2022, and have each done quite well along with Energy and Finance names. $VWNDX and $DODGX from Vanguard/Dodge & Cox have also done well this year. Fidelity’s Int’l Value fund is doing quite well, albeit with high fees. Getting away from the #SPX and #NDX in particular are worth their weight in gold right now.
While I didn’t chart it, I’d certainly encourage a look at $VWNDX for US value. A combination of $VIGAX and $VWNDX ($VIGAX is the mutual fund version of $VUG) have far out-performed a combination of $VIGAX and $VVIAX (or $VUG and $VTV). Active value is certainly proving itself. I assume this is an anomaly, and as prices begin to come back to earth, the indexes will out-perform.
They usually do.
As for now, retail is still chasing growth and high-attention stocks. If you haven’t taken the time, take a look at your options and ensure you’re not being artificially locked into investing in the same “old” stuff.
On Russia:
Tensions over Russia’s military buildup near Ukraine are entering a potentially decisive week, with the U.S. warning an invasion may be imminent and President Vladimir Putin accusing America of failing to meet his demands.
U.S. National Security Advisor Jake Sullivan, who on Friday cited the risk that Russia will attack or seek to ignite conflict within Ukraine this week, told CNN on Sunday there’s “a distinct possibility that there will be major military action very soon.”
Have a Happy Valentine’s Day! Remember to call your loved ones and let them know that, well, you know, that you love them. 😉
—Avery