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Day 9 | Domestic Equities Back on Top
12 Days of Christmas: Themes to Know for 2017

As we move into 2017, knowing where to focus our allocation is of the utmost importance. Although there has been quite a bit of rotation among the asset classes throughout the last year, we now find ourselves in an environment where Domestic Equities is back on top in 401k Control. In many ways, the frustrations of 2016 closely parallel sentiments from 2011. We can visualize the similar movements on the 20-point chart of the S&P 500 Index SPX. In both instances, the market traded within a range bound pattern for several months, completing short-lived negative trend changes and a few unsettling peak to trough moves. With this range-bound action and the Q1 correction, Domestic Equities deteriorated relative to other asset classes and fell from its 4.5 year position as the #1 ranked asset class in 401k Control, to #3 by February. The strong March and April market gave it a running start, but it once again lost its footing with the brief “Brexit” pullback in June. By July, the asset class was once again exerting its dominance as a number of equities hit new highs.

Ultimately, Domestic Equities moved back into the top spot in 401k Control by mid-August and the SPX has completed several new highs since. Following 401k Control signals confidently, especially after enduring a “bad” signal, requires discipline and the ability to manage emotions – two things that are not only difficult but can often feel counterintuitive. We provided a straight-forward portfolio test that simply takes the asset class ranking methodology of 401k Control, and assigns proxy investments for each asset class.

The study begins in December 1999 and has been updated through December 22, 2016, using the 401k Control asset class rankings at the end of each month to construct various portfolios. While no single asset class is the right investment for all of your client assets at all times, the #1 ranked asset class in 401k Control is shown to produce substantially better outcomes than the bottom ranked asset class, or the other combinations as shown in the study. A process that allows you to allocate more of your assets to the top-ranked asset, and less to the bottom ranked asset, can have a meaningful impact over time. In 2016, the rotation in 401k Control asset ranks, and also within sector leadership in various asset classes, caused heightened turnover and lagging performance. These are never pleasant periods; however, they are also short-term impacts that are frankly consistent with other such rotational periods in market history. In most years the market presents a stable leadership option, and in others it involves us in the process of finding one. Over time, the performance advantage of that top-ranked asset class is an important reality, and an important part of any discussion we will have during your annual review regarding why I employ a top-down investment process that is grounded in relative strength analysis.


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