The Worst Combined Market in 45 Years

This year has been an atrocious year for Tines Capital’s algorithmic portfolios. Stocks and bond have in unison had a terrible year. There has not been a year like this in at least the last 45 years. I want to discuss what the algorithms could have done better and how they are being improved. Despite the abysmal returns so far this year, I believe that Tines Capital’s algorithms are actually better than ever and one of the best choices for long-term investors.

This Year is 1 out of 45

For decades people have invested in blends of stocks and bonds. In general bonds are more conservative than stocks, and some types of bonds even tend to go up when stocks go down. In the COVID-19 crash, the 2008 financial crisis, and the dot-com crash, long-term U.S. government bonds went up while stocks went down. Investing in both stocks and government bonds together has historically helped soften the blow when one of those markets has a really bad year.

Unfortunately, 2022 YTD has the worst combined return for a 50/50 split of US stocks and long-term US government bonds in at least 45 years! The chart below shows each year with a negative return from 1978 to 2022. The return of 2022 YTD is far worse than any of the other negative years in that 45 year period!

Data was taken on 5/23/2022

Why the Algorithms FailEd in 2022 YTD

Portfolio design is often done by looking at the past to make projections for what the future could be. Though past results can’t guarantee future results, looking at the past is certainly a reasonable part of investment research. There is a long history of U.S. long-term treasuries doing pretty well when U.S. stocks do poorly, and this relationship will likely continue to occur more often than not – but certainly not in 2022 YTD.

Many of the algorithms operated by Tines Capital utilize stocks and U.S. bonds to diversify risk and provide opportunities when the other asset is not doing well. With both assets doing bad this year, it has been a huge headwind for the algorithms. The algorithms would ideally better adjust for that, but that is easier said than done.

There is a case to be made that the Tines Capital algorithms relied too heavily on this stock/bond relationship, especially with interest rates so low already. For example, there was a portion of the algorithm that had a rule as follows:

“If stocks do bad by X number of metrics then invest Y% of the portfolio in bonds.”

Obviously, if both assets have a really bad year at the same time, this can be a problem, depending on how big the allocation is in the algorithm.

How the Algorithms are Changing

When operating algorithms, you never want to change it without statistically supported evidence or indications of risk being too high. After 2022 there is certainly enough statistical evidence to support a change to how the algorithms handle bonds. The rule discussed above has essentially been improved to the following:

“If stocks do bad by X number of metrics and bonds do well by Z number of metrics, then invest Y% of the portfolio in bonds. If neither is doing well then look to see if the U.S. dollar is doing better or worse than foreign currencies and invest accordingly with T% of the portfolio.

This rule improvement was made after simulating the overall algorithms performance from 2004 through 2022 YTD. Though I wish this change was done before 2022 started, the change would have only softened the blow a bit. With the headwinds that 2022 provided YTD, it was going to be a bad year either way.

In addition to the change listed above for bonds, some of the algorithms are more diversified than before with a few additional indicators and investment options, such as bets on the USD, against the USD, and on commodities.

Why Not make Other changes?

With the gift of hindsight there are of course other changes that could have turned 2022 YTD into a great period. There is always some asset that is having good returns. It is always tempting to return chase and make a bunch of changes, but this is usually not wise. For example, going short the U.S. stock market at the beginning of 2022 until today would have had a great return. Unfortunately, knowing when to short the stock market is even harder than knowing when to rotate out of stocks into bonds or cash. Shorting the U.S. stock market is like swimming upstream with increased margin rates, margin call risk, and requires nearly perfect timing. We want the wind at our back when investing. Therefore, we will continue to only make changes to the algorithms if there is statistically significant evidence of improvement over the long term. Good results for a short period are not enough to make a change.

Looking Forward

It will take a while to climb out of the hole that the algorithms are in for 2022, but for long-term investors the Tines Capital algorithms remain one of the best investment opportunities available. There may be more pain ahead, or we may have already hit the bottom. Either way, investors should take heart that things will eventually get better. For those with money on the sidelines they should see this as a prime opportunity to put their funds to work. Waiting for markets to drop lower before investing is often hard to time and performs worse than regularly investing money when it is available. As always, remember that patience and consistency are crucial to your success.

Additional Info

The data in this post is primarily pulled from this page on portfoliovisualizer.com. The post talked about the last 45 years only because that is as far back as a 50/50 stock and long-term U.S. government bond portfolio can be displayed on that website, where readers can easily verify and explore.

Below is a chart showing the annual returns used in this post from 1978 to 2022 YTD. This data was also compiled from portfoliovisualizer.com.