A Look at Current Asset Class Rankings

A Look at Current Asset Class Rankings

Posted on January 15, 2020


Market State 1( Bullish): The S&P 500 remains in a bullish Market State with low volatility.  Low volatility is a sign of low risk in the markets, while high volatility equates to high risk and high drawdown.

Canterbury Volatility Index (CVI)- CVI 45): Volatility remains extremely low.  Low volatility, as mentioned above is good for markets, as studies have shown that all bear markets are volatile while bull markets have low volatility.  It has been discussed in most past weekly updates, but volatility is in extreme low territor. Be on the lookout for a spike in volatility, as this can lead to an outlier day or few.  There is no predicting when a spike in volatility will occur, nor whether it will be up or down.

Comment
The S&P 500 continues into the new year on the same note it ended 2019, which is a good thing considering we are in a bullish market environment.  In fact, the S&P is leading all other indexes, with the exception of the Nasdaq.  As a reminder, the Nasdaq 100 is composed of the large cap technology stocks, which as mentioned in last week’s update, technology is the largest S&P 500 sector by a considerable margin.
Most of the market’s return for the year (which is has only been less than 2 weeks), has come from large cap growth, which would largely be technology stocks.  In fact, while the S&P 500 are up to begin the year, over half of the investment style indexes are actually down.  To begin the year, only Large Cap Growth and Mid Cap Growth are up… of course this should all be taken with a grain of salt considering that the year has only been less than 2 weeks.

The table below shows Canterbury’s risk adjusted rankings for each investment style.  The Volatility-Weighted-Relative-Strength (VWRS) ranking is a risk-adjusted ranking accounting for both a security’s strength as well as volatility.  We can use this ranking to compare assets of similar or differing classes, such as technology versus discretionary or stocks versus gold or bonds.
 
Investment Style VWRS Rank
Large Cap Growth 1
Large Cap Value 2
Small Cap Growth 3
Mid Cap Growth 4
Small Cap Value 5
Mid Cap Value 6
 Source: CIM

The following table shows the VWRS relative rankings of various asset classes:
 
Investment Style VWRS Rank
US Large Caps 1
Gold 2
International Developed 3
Emerging Markets 4
Investment Grade Bonds 5
Long Term Treasuries 6
7-10 Year Treasuries 7
US Dollar 8
 Source:CIM

On a risk-adjusted basis, US Stocks and Gold have been the strongest 2 asset classes, followed by international stocks.  Bonds, which typically have lower volatility are being led by investment grade corporate bonds, while the dollar has struggled recently.

Portfolio Efficiency
The Canterbury Portfolio Thermostat does not aim to compete against any individual index or blended benchmark.  We know that portfolio efficiency is a moving target, and all asset classes will go in and out of favor.  The Portfolio Thermostat is an Adaptive Portfolio Strategy designed to navigate various markets and create an efficient portfolio for today’s environment- Bull or Bear.
 
Canterbury benchmarks its portfolio against key “internal” metrics, in order to measure portfolio efficiency.  These metrics are Portfolio State, Portfolio Volatility, and Portfolio Benefit of Diversification.  Together, these internal benchmarks create the Portfolio Efficiency Score.

Bottom Line
We are in a new year, but the game continues.  Investing is a process that doesn’t understand the calendars.  With that being said, large cap stocks, like the S&P 500 have started the year out leading the equity markets.  This is again, mostly due to technology.  Gold is also showing strength on a risk-adjusted basis, outpacing a few equity classes in this metric.  Out of the different bonds, investment grade corporates have been stronger than treasuries on a risk-adjusted basis, while the dollar has struggled.