October has been another volatile month in the stock market. The theme for 2018 continues to be volatility. As you can see from the chart of the S&P 500 below, our long-term indicator continues to be positive although the gap between the 10 week (green line) and the 50 week (red line) has been cut in half during October, as there appears to be a negative trend. As you may know, if the trend continues and the indicator turns negative we will sell equities in all the portfolios and remain out of equities until the indicator begins to turn positive once again. We are as always continuing to monitor this situation.
In our last investment committee meeting we discussed the current equity portfolio construction. For the last several years the equity portfolio has been over weighted towards large cap growth which has served us well, history tells us that during periods of rising rates, value out typically performs growth. Therefore, in the near future, we are considering shifting some of the weighting in the equity portfolio from growth to value. We are continuing to monitor the interest rate situation before making a final decision about this slight adjustment to the equities.
Speaking of interest rates. As our Investment committee reviewed our bond holdings during our monthly review we discussed the current rising rate environment as it pertains to our fixed income positions. As bond investors, there are plenty of concerns with lower bond yields and the position the Federal Reserve has taken to potentially continue to raise interest rates. But with proper analysis of historical interest rates, and in reviewing their impact on bond returns, we find that rising rates may not be a significant negative factor to a bond portfolio over the medium to long term. In fact, as interest rates rise, yields will rise as well. Our current bond portfolio has very short-term duration of 3.49 years1. This means that the bonds held in the various bond funds will have their interest rate "reset” approximately every 3.5 years2 on average. Therefore, as those bonds are repaid those proceeds can be reinvested at higher yields. We will continue to consider and monitor the Feds positions and other market environment factors as we position our fixed income portfolios in this particular environment.
Feel free to let us know if you have any questions or if we can help you in any way.
1 3.49 years duration is Trinity’s weighted average duration of aggregate bond portfolio
2 3.5 years is Trinity’s effective average maturity of aggregate bond portfolio
viewpointsObservations and Updates from CCA
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