First, we sincerely hope this note finds everyone safe and healthy in your world. Blessings abound for our team and our families, and we are grateful to be here to serve our clients and friends. To paraphrase the line from Cool Hand Luke, we will not be accused of a ‘failure to communicate’! Every month, on the last trading day when we rebalance our portfolios, we send a note to our clients and partners with an update on changes in the model and the status of price trends based upon our rules and systems. This month, we want to share it with our full audience, because we believe it is insightful regarding the current environment, and because we are proud of our work. Please read on.
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To all Blueprint Clients and Partners:
March 31st, 2020
Below are the asset classes utilized in Blueprint portfolios and their model-driven exposure heading into April. For a full-page PDF please click here.
At a Glance: Allocation Adjustments as of March 31, 2020
- U.S. Equities: decreasing to the minimum allocation due to downtrends in all timeframes.
- International Equities: decreasing to minimum allocations due to downtrends in all timeframes for both Foreign Developed and Emerging Markets.
- Real Estate: decreasing to the minimum allocation due to downtrends in all timeframes.
- Fixed Income: remains in uptrends across all timeframes for U.S. Bonds. International bonds are now experiencing an intermediate-term downtrend and its allocation will decrease accordingly. Overall, Fixed Income exposure of intermediate and long-term duration will be unchanged from last month.
- TIPS: decreasing due to intermediate-term downtrend.
- Short-Term Notes and Cash Equivalents: increasing in all portfolios due to its strength in the yield curve and as it takes on allocations from weaker equity and bond segments.
Asset Level Overview
Equities and Real Estate
In a word – historic. Only the most notorious drops in the benchmark indexes provide historical comparisons for what has occurred in the financial markets since late February. The Market Crash of 1987, the Financial Crisis, the Great Depression…the COVID Crash of 2020 now joins this infamous list. And it has been by far the most rapid.
As is probably expected, models are moving to minimum equity and real estate exposure across the board. After intermediate-term downtrends in late February reduced equity exposure across all Blueprint portfolios, a long-term downtrend has now occurred.
Similarly historic has been the decline in yields among U.S. Treasuries, resulting in a surge in bond prices through the first half of March. Valuations have since steadied but remain elevated across all segments of the yield curve. Looking internationally, the massive impact of COVID has actually weakened sovereign bond prices leading to downtrends in those Fixed Income sectors. This exposure will be re-allocated domestically. With all Blueprint strategies reducing risk at a macro level, the overall Fixed Income allocation will increase heading into April. However, the increase in exposure will flow to U.S. short duration bonds and cash equivalents, with average duration decreasing to 3 years from 5 years.
Three potential macro catalysts for the recent trend changes:
- Coronavirus becomes a pandemic: U.S. equities fell to three-year lows as the Coronavirus impacts all facets of every day life in the U.S., Europe, and Asia. Over 200 countries or territories have reported cases. The COVID-19 outbreak is having a larger than could have been anticipated ripple effect throughout the global economy, especially as more cases are diagnosed in the U.S.
- The largest fiscal stimulus package in history: World War II cost the U.S. $4 Trillion inflation-adjusted. It is hard to fully calculate, but we are somewhere in the range of $5 Trillion in total stimulus, so far. This is a main street crisis not a wall street crisis, so the effect of all the stimulus will not be known until after this is over, but we know the stress on the financial system and the impact on GDP increases risk for investors overall.
- Falling U.S. interest rates: Enhanced Fed stimulus drove the yield on U.S. 10-year treasuries to all-time lows in March, and it is below 70 basis points as we write this note. The Fed announced that it had no limit on its purchases of Treasuries and agency mortgage-backed securities while also beginning to purchase investment-grade corporate bonds. In addition, the Fed revived the Term Asset-Backed Securities Loan Facility (TALF). A big unknown is the impact on the mortgage market, as distortions have caused significant challenges in pricing mortgages impacting the ability of borrowers to access credit.
Blueprint is Built for This
Schools and other organizations will periodically plan, prepare, and execute fire drills. Soldiers continually conduct training exercises simulating real life combat situations. Theater productions complete dress rehearsals. Why? The reason is to develop a mental imprint so that when real conditions are present – whether a fire, a battle, or opening night, individuals can lean on their training and execute their plan, rather than freeze in the intensity of the moment.
For asset managers like Blueprint, the COVID Crash represents a moment of truth. We consistently preach about the value of having a plan. This serves two purposes. First, having a plan removes emotion and indecision when time is of the essence. In environments where uncertainty and fear are rampant, the value of flawless execution is paramount with the benefits often remaining invisible until after the fact. Second, it allows us to be completely focused on what matters most – you and your clients. To us, being on the offensive in this environment looks like constant communication, transparency and support.
This is exactly what Blueprint has been up to in March. After reducing exposure to equities at the end of February just like we did prior to the sharp declines in December 2018, Blueprint has spent the month producing new content pieces to convey our asset allocation decisions and provide context during these historic times. At the same time we have been constantly meeting with our partners and their clients.
In early March we discussed the futility of looking for answers from Wall Street and the government while instead leaning on process to create Clarity Amid Confusion for clients. The following week we shed light on the 10 Best Days Rule and how it falls woefully short as a justification to endure periods like this. Last week we showed advisors the importance of Flattening the Emotion Curve for their clients. In addition, we have released two videos that hopefully further explain our processes around these and other topics.
While we have heard concern and anxiety among the folks we chat with, we have also experienced confidence and a sense of stability. Most investors have remained committed to the plans developed with their advisors. This hearkens back to the comments we made in last month’s update, which we had no idea would be so relevant.
Creating a measure of certainty, by having a pre-determined plan, can serve to calm nerves and keep clients focused on their long-term goals. It can be compared to a fire drill or evacuation plan – by visualizing negative outcomes and developing a series of response steps, advisors can project confidence and reduce fear. This, in short, is the power of partnering with Blueprint.
Much is being done to offset the economic damage done by the virus through unprecedented stimulus packages and central bank interventions, but tremendous uncertainty remains. Potentially historic unemployment and GDP contraction appear inevitable. As mentioned earlier, there are very few analogs with which we can compare, making it difficult to assign a range of possibilities, much less to identify a precise outcome. With circumstances like these it is comforting to have a process allowing us to bypass much of the chaos until a semblance of normalcy returns. If that happens sooner then expected then we will be ready to capitalize.
Until then, our systems guide our portfolios to lean into capital preservation.
For more on how Blueprint Strategies can help you succeed in your practice, please feel free to call me directly for additional information or details. We are always pleased to discuss the current environment with you and are equally interested in your thoughts.
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Not a recommendation of any security or strategy. Intended for informational purposes only. Past performance is not indicative of future results. Information contained within has been obtained from third party sources and is accurate to the best of our knowledge. Historical data is presented for informational purposes only. Investing contains significant risks including the risk of loss. Investment decisions should be made based on the investor’s specific financial needs and objectives. For more information on Blueprint’s process and asset allocation strategy visit www.blueprintip.com.