April 2023 Rebalance Rationale

by | Apr 25, 2023 | Rebalance Rationales

The first quarter of 2023 started out with a bang. Q1 experienced what felt like three distinct market cycles condensed into three months. January experienced a perceived “Soft Landing” where inflation was seen as falling quickly while the economic data was on the softer side. The market interpreted this as ammunition for a lower terminal rate and quick Fed Pivot, stocks and bonds rallied. 

February turned into the “No Landing” scenario where inflation and employment data firmed. The market began pricing a higher terminal rate and a higher for longer fed given a resilient “Goldilocks” economy.

Finally, with March came a higher likelihood of a “Hard Landing” scenario following the collapse of several banking institutions and the freezing of some credit markets. This led the market to anticipate quick Fed cuts. The perception of Fed balance sheet expansion and rate cuts led to a return to the preference of growth assets. The Nasdaq Index (NDX Index), led by mega- tech was up 20.77% for the quarter with an impressive 11.39% rally in the last 2 weeks of March. 


Source: Bianco. As of 3/31/23.



Model Rebalance 

We have a small rebalance across the board (all models) which we think will serve portfolios well given the market outlook and present (and ongoing) volatility. In line with our theme for 2023 “Year of the Yield”, we’re slightly increasing our JUCY allocation. The increase is funded by trimming 1-2% each of our holdings of DRSK, ADME and SPLG.  


Bump up JUCY 

Back in November we launched JUCY. It’s our take on a combo of treasuries and an option overlay to provide real positive yield without the credit or duration risk typical to most high yielding vehicles. We are beyond excited by the prospects of this fund and how it impacts the hurdle rate set for other investments within our portfolios. 


Valuations, Tradeoffs, and Our Portfolios

The market seems to be priced for a soft landing and no recession. 

We’ve recently asked audiences for their estimate for 2023 earnings per share, and a multiple on those earnings. (Saying a company earns $2 to the bottom line and trades at a 10x multiple means it has a stock price of $20 (2 x 10). You can do the same thing with the overall S&P 500.)

The answers have been ~ $215 for earnings and ~ 18x on the multiple. That simple math of multiplying earnings by the multiple paid on those earnings (18 x 215) would put the S&P 500 Index at 3,870 – roughly 6% BELOW today’s price of 4,115 as I type. 

The simple example above assumed earnings remain close to current estimates and multiples remain elevated relative to history. Both ‘cup half-full’ estimates. 

JD mentioned in his most recent note JD March 2023 Note, when you look at the simple math of the earnings and multiples on S&P 500, it’s hard to get excited about the near term prospects for returns. 

Returns are generated from Yield, Growth and Valuation expansion/contraction. We now have an investment option that pays a double-digit yield with 1-3YR Treasury type volatility (SHY ETF). To us it makes sense to hunker down and collect the yield versus the alternative of banking on earnings resiliency and a continuation of heightened multiples.

We are bumping up our yield across the portfolios. The increase is funded by trimming a 1-2% of other fixed income exposure and 2-4% in equities depending on the composite.  


Tax Loss Harvest IDME

We will also be taking the opportunity to selectively tax loss harvest (“TLH”) IDME in non-qualified accounts as we make the conversion to IDUB. We will be using the iShares Core MSCI Total International Stock ETC (IXUS) as a proxy. For those accounts with gains, as we recently did an exercise to opportunistically TLH in November, it is important to know that there is no action required. The strategy will seamlessly transition from IDME to IDUB. For more information on the strategy change, please click here.


To Conclude

We are excited for the opportunity to tactically bump up the JUCY allocation across our portfolios. We believe JUCY enhances the yield profile and dampens the volatility of our overall allocation. The addition takes advantage of higher market yields and higher market volatility (which equates to more income from the options overlay) to provide more income return across the allocations. 





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