Logical Invest Investment Outlook - January 2017

Our top 2016 strategies:

SPY, the S&P 500 ETF, returned 12.00%.

Market comment:

To put 2016 in perspective, we must go back to 2015 and remind ourselves how the rising dollar environment affected diversified investors. Most asset classes suffered through 2015. The S&P 500 stayed flat, long term Treasuries lost 2%, gold lost 9%, emerging markets shed 17% and USO, the crude oil ETF was down 44%. To make things worse, in August 2015 there was a sharp correction in equities which caused many “weak hands” to just exit the market.

The first half of 2016, by contrast, rewarded anyone holding any of these assets.The second half proved far more challenging as rising yields expectations depressed bond prices, with TLT loosing 16% from July to December. Expecting higher yields in the U.S. can cause an appreciation in the U.S. dollar which in turn causes weakness in dollar denominated assets like gold and foreign equity. All of these assets gave back some of the early 2016 gains. Two major events, the Brexit vote and U.S. elections proved to be much less disruptive than expected. For 2016, The S&P 500 returned 12%, long term Treasuries gave up early gains to stay flat and gold gained 6%. Emerging markets gained a respectable 14%.

All our strategies were positive for the year. Our ‘non-equity’ strategies did well outperforming their respective benchmarks:  Our volatility harvesting strategy (MYRS) returned 29.92%. Our Bond rotation strategy (BRS) returned 13.62%, compared to 1% for TLT and 2.4% for AGG. Our Gold hedged strategy (Gold-USD) returned 15.74% compared to 6% for Gold.

For 2017, in preparation for rising yields, we have adapted our strategies to rely less on the 30-year Treasury ETF (TLT). We introduced inflation protected treasuries as an additional hedge and used dynamic selection of the hedging instrument based on a new TLT/TIP switching algo as well as our successful Bond Rotation Strategy. 

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