We’ve fielded a lot of questions this morning about how Tactical Asset Allocation is faring this month. We track 50+ published strategies, so we’re able to draw some broad conclusions about the current state of TAA.
Generally speaking, all is well. Individual strategies vary, but as a whole, TAA has weathered the storm so far. Most strategies are either up or near flat for the month.
Why? TAA began reducing exposure to risk assets back in January, and entered March 76% allocated to defensive assets like treasuries and gold. Read more.
If history is any guide, and market weakness continues, TAA will reach peak defensiveness by the end of March or April. Read more.
So far this has been a crisis that TAA was designed to handle. There were signs of weakness in the two preceding months, which gave strategies time and confidence to reduce exposure.
It’s way, way, way too early to take a victory lap though. A big question for TAA is what this bottom looks like. If it comes soon and it’s sharp (as in previous scares over the last two years) TAA will be left out of the recovery or worse. TAA is heavy intermediate/long-term US Treasuries at the moment. Given recent volatility in yields, I could see TAA taking significant losses on those in a big market bounce.
Edit Thu 03/12: While the concern described above looks less and less likely, there’s another to consider: whether traditional defensive assets like gov bonds and gold continue to provide protection during this slide. As we saw yesterday, that’s not necessarily the case. That may be even more true at these historically low yields, as we’re yet to see how well they’ll behave as they head towards zero and beyond.
In short: So far so good, but we’re not out of the woods yet.
Stay safe out there.
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