Updated January 27, 2025
Dynamic Macro Portfolios: Protecting Against Black Swans
Dynamic Macro Portfolios: Protecting Against Black Swans
Dynamic Macro Portfolios: Protecting Against Black Swans
AJ Giannone, CFA
TheMacroscope
Dynamic Macro Portfolios: Protecting Against Black Swans
A dynamic portfolio empowers investors to quickly adapt to changing macroeconomic conditions. The modern financial world is filled with variables that pundits discuss non-stop in the news and on the blogosphere. It can be a lot for an everyday investor to take in without worrying about all that could go wrong. Regional wars, natural disasters, monetary policy missteps, fiscal irresponsibility, and soaring debt levels – all of these risks make it difficult to be assured that your investments are allocated properly.
Allio’s Dynamic Macro Portfolio is designed to put you, the investor, in the driver’s seat; you do not have to be relegated to sticking with a passive portfolio. Rather, the Dynamic Macro Portfolio can shift to today’s uncertain global catalysts. We give you the tools and technology to ensure your portfolio is best positioned to meet and exceed your goals.
“Dynamic” also involves a range of styles and an extensive menu of vehicles to express a certain macro view. Our portfolio managers will continually monitor your allocation to make sure it aligns with your long-term goals. We assert that two particular risks emerge today that threaten the viability of traditional investing: the debt cycle and geopolitical risk.
Why Now’s the Time to Be Dynamic
There’s no need to be dynamic in a world that regularly delivers compounded annual returns of 8-10% with low volatility. You could just shove all your money into an S&P 500 or global equity index fund and call it a day. Of course, we don’t live in that world. Though the average compounded annual total return for just about all diversified equity allocations is in the high single digits before taxes and inflation, the actual distribution of those returns is disparate.
Just take a look at the S&P 500 Total Return Index since 1928. According to data from NYU Stern, while the typical gain has been north of 11%, it’s highly unusual to see a “normal” year. A 20%+ rally or a 0% or worse fall is the more probable single-year outcome. Also, while 11.8% is the yearly average, when you compound returns over the decades the geometric return is a bit lower.
S&P 500 Total Return Index: Annual Returns Since 1928
Source: NYU Stern
S&P 500 Annual Returns and Intra-Year Declines
Source: J.P. Morgan Asset Management
The US Dominates Today, But That’s Not Guaranteed In the Future
Source: Goldman Sachs
Bull and bear markets abroad can make yearly gains and losses even more severe than what’s seen in the S&P 500 Total Return Index. While it’s true that adding foreign equity exposure can reduce volatility over the long haul, there are plenty of periods during which ex-US stocks merely serve to amplify what’s happening domestically in markets.
During the 2007-09 bear market, for instance, the S&P 500 Total Return Index lost 55%. Global diversification hurt since both the iShares MSCI EAFE ETF (EFA) and the iShares MSCI Emerging Markets ETF (EEM) plunged even more.
S&P 500 Total Return Index, EFA, EEM During the 2007-09 Bear Market
Source: Stockcharts.com
Including other asset classes and portfolio hedges could have helped to protect investors from such damaging losses, but that too may come at the cost of underperforming on the way back up. Adding, say, an aggregate bond fund, a gold ETF, crypto, exposure to Real Estate Investment Trusts (REITs), and overweighting the Energy sector are popular diversification tools.
Unfortunately, sticking with such a mixed allocation proves challenging when one or more areas inevitably experience its bout of negative alpha to stocks. The risk is that these model portfolios that many retail investors are shoved into sound great in theory, but don’t work well in practice because of both real-world underperformance trends and individual behavioral considerations such as the fear of missing out, loss aversion, and confirmation bias.
Diversifiers Sharply Underperformed the S&P 500 Total Return Index (2015-2024)
Source: Stockcharts.com
The Need to be Dynamic
Modern Portfolio Theory (MPT) also falls short due to the ever-present risk of black-swan events. Once again, a cookie-cutter allocation should do well if the world were always in balance and at peace. In recent times and throughout decades and centuries past, we find that unforeseen and unusual events happen all the time.
The dot-com bubble’s burst, 9/11, corporate accounting scandals, uprises in the Middle East, the Great Financial Crisis, the Fukushima nuclear disaster, the Cypress Crisis of 2013, Brexit, Donald Trump’s 2016 win, COVID-19, the UK’s gilt crisis of 2022, Tokyo’s Black Monday of August 2024 – this is a short list (just over the past quarter-century) of many events that had major implications for global markets.
How many of them were predicted by so-called Wall Street experts? Very few, and even those that were broadly forecasted, accurately gauging how markets would react was virtually impossible. While there’s no perfect solution, staying nimble with your investments and keeping your portfolio in line with your needs and goals is critical.
We take that to heart in how we form portfolios for everyday investors. Our tools, which include Allio’s Macro Dashboard, are designed to help investors keep an eye on geopolitical and financial risk to make sure they stay ahead of the curve.
The Debt Cycle and Geopolitical Risk in Today’s Investing Climate
Knowing that typical portfolios often fail investors when unexpected events rattle markets, it helps to understand what drives volatility. There are telltale signs of fragility in the financial system based on the debt cycle.
Quickly rising debt levels can turn a once-thriving economy into one tainted by high perceived risk. Governments often face pressure to inflate their way out of increasingly problematic debt burdens, thereby contributing to soaring consumer prices and restrictive monetary policy. High interest rates charged by both banks within a country’s borders and investors abroad can devolve a competitive economy into one that’s structurally challenged for decades to come.
We can look to history to find examples of the debt cycle causing fast economic unwinds: Germany in 1932, Austria in 1945, Vietnam in 1975, the Latin American Debt Crisis of the 1980s, Greece in 2012 and 2015, Russia in 1998 and 2022, and even the UK for a moment in 2022.
Each of these events had its unique aspects, but the underlying issue was government mismanagement of fiscal and monetary control. Leveraging an economy works well amid slow and steady growth. As volatility increases and the trajectory of GDP begins to rock back and forth, that’s when high debt turns from being a side story to front-page news.
Americans caught a glimpse of what the early stages of the debt cycle look like. In 2022, after years of negative correlations between stocks and bonds, the S&P 500 was suddenly taking its cue from movements in the Treasury market. When yields then spiked, it often meant bearish price action in equities, and that correlation persists through today.
With national debt rising at unprecedented levels, concerns grow that the federal debt burden may come home to roost before long. As of late 2024, the national debt approaches $40 trillion, driven by massive deficit spending the likes of which are usually only seen during recessions.
US Federal Net Debt History and Forecast
Source: J.P. Morgan Asset Management
Large Annual Deficits Appear to be the New Normal
Source: BofA Global Research
We have already seen interest rates respond. In late 2021 – well into the post-COVID economic recovery and with the aid of the Federal Reserve – yields were suppressed to under 1% on the 10-year Treasury.
Jump ahead to today, and the 3.3-5% range has held for many quarters on end. Stocks were hit hard in 2022 when rates launched higher, but as yields have stabilized, equities have done well.
10-Year Treasury Yield: Consolidating After a Sharp Increase
Source: Stockcharts.com
Indeed, stocks usually like stability in the bond market. What if, however, 2022 was merely the first leg up in a protracted period of rising rates? How might traditional risky assets perform if the 10-year yield jumps above 5%? Volatility would probably ensue. That would coincide with the next stage of the debt cycle for the US. You can imagine that with $40+ trillion of debt and perhaps a 6-7% cost to borrow - all eyes would be glued to happenings in the fixed income space.
A dynamic macro strategy can adjust to these kinds of broad shifts. That’s not to say that it will always produce gains, but there are trends of growing uncertainty regarding debt levels and the government’s ability to repay its financial obligations. It then seems prudent to dynamically allocate to areas like gold, bitcoin, oil, and inflation-sensitive spots that might help weather the potential storm.
Geopolitical Risk Rising
As mentioned at the onset, geopolitical risks are apparent. All it takes is for one global black-swan event to cause the debt cycle to accelerate. Inklings of that were felt during the first half of 2022 when Russia invaded Ukraine. The global economy was on thin ice amid high deficit spending across developed countries, with particular uncertainty in Europe. The invasion of Ukraine resulted not only in soaring oil prices around the globe but also serious energy-related risks in spots that depended on Russia for natural gas.
The US endured an inflation uptick, but companies and households across the pond feared not just for their financial security but also for their lives. Natural gas pipelines were closed and Europe, which had previously increased its dependence on unreliable renewable power. The potential for a deadly winter brought geopolitical fears into cold reality. While major loss of life was averted, the saga was just a single instance of how geopolitical developments can bring about black-swan risk.
Our team is constantly considering future black swans. Geopolitical tensions, financial crises, technological risks, environmental catastrophes, bioterrorism, and social unrest are just a handful of potential perils on the horizon. Markets seem to be on the same page in light of gold’s rally in the last few years and bitcoin’s resiliency. One thing we don’t expect is peace and tranquility among nations.
Dynamic Portfolios: Defensive During Downtimes, Opportunistic In Uptimes
The goal of a Dynamic Macro Portfolio is to protect against severe downside losses while still participating in bull markets, all so that you can meet your financial goals. When bear markets strike, owning assets that outperform protects against larger permanent losses.
For instance, during inflationary periods, including inflation-protected bonds, such as TIPS, in a portfolio can produce alpha versus nominal Treasuries.
June 2020-June 2022: TIPS ETF vs Nominal Treasury ETF: 18ppt of Alpha
Source: Stockcharts.com
Amid time or rising commodities, allocating to an oil ETF or other natural resource funds can lead to sharp gains.
January 2000-July 2008: WTI Crude Oil and the S&P 500 Energy Sector ETF Produced Explosive Returns While the S&P 500 Total Return Index was Flat
Source: Stockcharts.com
The mid-2000s taught macro investors that a real estate boom can turn REITs into growth vehicles.
2003-2006: Real Estate Stocks Took Off Before the GFC
Source: Stockcharts.com
Even on a short-run basis, a Dynamic Macro Portfolio can include positions that rally when stocks plunge.
January 2020-March 2020: Long-Term Treasuries (TLT) and Gold (GLD) Rose as the S&P 500 Total Return Index Sank
Source: Stockcharts.com
January 2008-March 2009: TLT and GLD up Double Digits with the SPXTR –43%
Source: Stockcharts.com
Market Cycles Result in Ebbs and Flows of Outperformance
Source: J.P. Morgan Asset Management
Knowing When to Shift
This all looks great on historical charts, right? It’s not so easy in real time to produce positive risk-adjusted returns. Allio’s portfolio management team makes tactical shifts to position Dynamic Macro Portfolios based on risks and opportunities. Today, considering elevated valuation for US large-cap stocks, it’s more important than ever to have a global allocation with access to diversification tools.
JPMorgan notes that with a forward P/E above 22x, future returns for the S&P 500 are likely to be low if historical trends generally play out. That’s not a guarantee, but it’s a sobering probability most investors right now just seem to dismiss.
S&P 500 P/E Ratios and Forward Equity Returns
Source: J.P. Morgan Asset Management
A Dynamic Macro Portfolio changes as market cycles unfold. Today, valuations are rich for US large-cap stocks, but that’s where the earnings growth has been. It’s reasonable to see continued near-term outperformance from some of the past cycle’s winners, but we expect other asset classes to offer strong returns and even defensive benefits if and when the Magnificent 7, (Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL/GOOG), Amazon (AMZN), NVIDIA (NVDA), Tesla (TSLA), and Meta (META)), lose their luster.
The Bottom Line
Allio’s Dynamic Macro Portfolios are designed to participate in bull markets and offer defense in bear markets. As the global debt cycle evolves and amid rising geopolitical tensions, our team expects black-swan events to unfold with little warning. That would drive macro volatility and demand that investors be more nimble with their allocations. History proves that being dynamic and open to new ideas can work in both up and down markets.
Our curated and extensive menu of investments puts you in the driver’s seat to control your financial future. Allio users can add, remove, and rebalance investments for maximum personalization, all with the confidence of knowing that our portfolio managers will continually monitor their portfolios.
At the end of the day, macro matters most! If you want to stay ahead of the curve, it's time to take a macro approach to following policy and market shifts. Position yourself for success by signing up for the Allio Capital beta today and make sure you're always on top of the trends that matter most.
Dynamic Macro Portfolios: Protecting Against Black Swans
A dynamic portfolio empowers investors to quickly adapt to changing macroeconomic conditions. The modern financial world is filled with variables that pundits discuss non-stop in the news and on the blogosphere. It can be a lot for an everyday investor to take in without worrying about all that could go wrong. Regional wars, natural disasters, monetary policy missteps, fiscal irresponsibility, and soaring debt levels – all of these risks make it difficult to be assured that your investments are allocated properly.
Allio’s Dynamic Macro Portfolio is designed to put you, the investor, in the driver’s seat; you do not have to be relegated to sticking with a passive portfolio. Rather, the Dynamic Macro Portfolio can shift to today’s uncertain global catalysts. We give you the tools and technology to ensure your portfolio is best positioned to meet and exceed your goals.
“Dynamic” also involves a range of styles and an extensive menu of vehicles to express a certain macro view. Our portfolio managers will continually monitor your allocation to make sure it aligns with your long-term goals. We assert that two particular risks emerge today that threaten the viability of traditional investing: the debt cycle and geopolitical risk.
Why Now’s the Time to Be Dynamic
There’s no need to be dynamic in a world that regularly delivers compounded annual returns of 8-10% with low volatility. You could just shove all your money into an S&P 500 or global equity index fund and call it a day. Of course, we don’t live in that world. Though the average compounded annual total return for just about all diversified equity allocations is in the high single digits before taxes and inflation, the actual distribution of those returns is disparate.
Just take a look at the S&P 500 Total Return Index since 1928. According to data from NYU Stern, while the typical gain has been north of 11%, it’s highly unusual to see a “normal” year. A 20%+ rally or a 0% or worse fall is the more probable single-year outcome. Also, while 11.8% is the yearly average, when you compound returns over the decades the geometric return is a bit lower.
S&P 500 Total Return Index: Annual Returns Since 1928
Source: NYU Stern
S&P 500 Annual Returns and Intra-Year Declines
Source: J.P. Morgan Asset Management
The US Dominates Today, But That’s Not Guaranteed In the Future
Source: Goldman Sachs
Bull and bear markets abroad can make yearly gains and losses even more severe than what’s seen in the S&P 500 Total Return Index. While it’s true that adding foreign equity exposure can reduce volatility over the long haul, there are plenty of periods during which ex-US stocks merely serve to amplify what’s happening domestically in markets.
During the 2007-09 bear market, for instance, the S&P 500 Total Return Index lost 55%. Global diversification hurt since both the iShares MSCI EAFE ETF (EFA) and the iShares MSCI Emerging Markets ETF (EEM) plunged even more.
S&P 500 Total Return Index, EFA, EEM During the 2007-09 Bear Market
Source: Stockcharts.com
Including other asset classes and portfolio hedges could have helped to protect investors from such damaging losses, but that too may come at the cost of underperforming on the way back up. Adding, say, an aggregate bond fund, a gold ETF, crypto, exposure to Real Estate Investment Trusts (REITs), and overweighting the Energy sector are popular diversification tools.
Unfortunately, sticking with such a mixed allocation proves challenging when one or more areas inevitably experience its bout of negative alpha to stocks. The risk is that these model portfolios that many retail investors are shoved into sound great in theory, but don’t work well in practice because of both real-world underperformance trends and individual behavioral considerations such as the fear of missing out, loss aversion, and confirmation bias.
Diversifiers Sharply Underperformed the S&P 500 Total Return Index (2015-2024)
Source: Stockcharts.com
The Need to be Dynamic
Modern Portfolio Theory (MPT) also falls short due to the ever-present risk of black-swan events. Once again, a cookie-cutter allocation should do well if the world were always in balance and at peace. In recent times and throughout decades and centuries past, we find that unforeseen and unusual events happen all the time.
The dot-com bubble’s burst, 9/11, corporate accounting scandals, uprises in the Middle East, the Great Financial Crisis, the Fukushima nuclear disaster, the Cypress Crisis of 2013, Brexit, Donald Trump’s 2016 win, COVID-19, the UK’s gilt crisis of 2022, Tokyo’s Black Monday of August 2024 – this is a short list (just over the past quarter-century) of many events that had major implications for global markets.
How many of them were predicted by so-called Wall Street experts? Very few, and even those that were broadly forecasted, accurately gauging how markets would react was virtually impossible. While there’s no perfect solution, staying nimble with your investments and keeping your portfolio in line with your needs and goals is critical.
We take that to heart in how we form portfolios for everyday investors. Our tools, which include Allio’s Macro Dashboard, are designed to help investors keep an eye on geopolitical and financial risk to make sure they stay ahead of the curve.
The Debt Cycle and Geopolitical Risk in Today’s Investing Climate
Knowing that typical portfolios often fail investors when unexpected events rattle markets, it helps to understand what drives volatility. There are telltale signs of fragility in the financial system based on the debt cycle.
Quickly rising debt levels can turn a once-thriving economy into one tainted by high perceived risk. Governments often face pressure to inflate their way out of increasingly problematic debt burdens, thereby contributing to soaring consumer prices and restrictive monetary policy. High interest rates charged by both banks within a country’s borders and investors abroad can devolve a competitive economy into one that’s structurally challenged for decades to come.
We can look to history to find examples of the debt cycle causing fast economic unwinds: Germany in 1932, Austria in 1945, Vietnam in 1975, the Latin American Debt Crisis of the 1980s, Greece in 2012 and 2015, Russia in 1998 and 2022, and even the UK for a moment in 2022.
Each of these events had its unique aspects, but the underlying issue was government mismanagement of fiscal and monetary control. Leveraging an economy works well amid slow and steady growth. As volatility increases and the trajectory of GDP begins to rock back and forth, that’s when high debt turns from being a side story to front-page news.
Americans caught a glimpse of what the early stages of the debt cycle look like. In 2022, after years of negative correlations between stocks and bonds, the S&P 500 was suddenly taking its cue from movements in the Treasury market. When yields then spiked, it often meant bearish price action in equities, and that correlation persists through today.
With national debt rising at unprecedented levels, concerns grow that the federal debt burden may come home to roost before long. As of late 2024, the national debt approaches $40 trillion, driven by massive deficit spending the likes of which are usually only seen during recessions.
US Federal Net Debt History and Forecast
Source: J.P. Morgan Asset Management
Large Annual Deficits Appear to be the New Normal
Source: BofA Global Research
We have already seen interest rates respond. In late 2021 – well into the post-COVID economic recovery and with the aid of the Federal Reserve – yields were suppressed to under 1% on the 10-year Treasury.
Jump ahead to today, and the 3.3-5% range has held for many quarters on end. Stocks were hit hard in 2022 when rates launched higher, but as yields have stabilized, equities have done well.
10-Year Treasury Yield: Consolidating After a Sharp Increase
Source: Stockcharts.com
Indeed, stocks usually like stability in the bond market. What if, however, 2022 was merely the first leg up in a protracted period of rising rates? How might traditional risky assets perform if the 10-year yield jumps above 5%? Volatility would probably ensue. That would coincide with the next stage of the debt cycle for the US. You can imagine that with $40+ trillion of debt and perhaps a 6-7% cost to borrow - all eyes would be glued to happenings in the fixed income space.
A dynamic macro strategy can adjust to these kinds of broad shifts. That’s not to say that it will always produce gains, but there are trends of growing uncertainty regarding debt levels and the government’s ability to repay its financial obligations. It then seems prudent to dynamically allocate to areas like gold, bitcoin, oil, and inflation-sensitive spots that might help weather the potential storm.
Geopolitical Risk Rising
As mentioned at the onset, geopolitical risks are apparent. All it takes is for one global black-swan event to cause the debt cycle to accelerate. Inklings of that were felt during the first half of 2022 when Russia invaded Ukraine. The global economy was on thin ice amid high deficit spending across developed countries, with particular uncertainty in Europe. The invasion of Ukraine resulted not only in soaring oil prices around the globe but also serious energy-related risks in spots that depended on Russia for natural gas.
The US endured an inflation uptick, but companies and households across the pond feared not just for their financial security but also for their lives. Natural gas pipelines were closed and Europe, which had previously increased its dependence on unreliable renewable power. The potential for a deadly winter brought geopolitical fears into cold reality. While major loss of life was averted, the saga was just a single instance of how geopolitical developments can bring about black-swan risk.
Our team is constantly considering future black swans. Geopolitical tensions, financial crises, technological risks, environmental catastrophes, bioterrorism, and social unrest are just a handful of potential perils on the horizon. Markets seem to be on the same page in light of gold’s rally in the last few years and bitcoin’s resiliency. One thing we don’t expect is peace and tranquility among nations.
Dynamic Portfolios: Defensive During Downtimes, Opportunistic In Uptimes
The goal of a Dynamic Macro Portfolio is to protect against severe downside losses while still participating in bull markets, all so that you can meet your financial goals. When bear markets strike, owning assets that outperform protects against larger permanent losses.
For instance, during inflationary periods, including inflation-protected bonds, such as TIPS, in a portfolio can produce alpha versus nominal Treasuries.
June 2020-June 2022: TIPS ETF vs Nominal Treasury ETF: 18ppt of Alpha
Source: Stockcharts.com
Amid time or rising commodities, allocating to an oil ETF or other natural resource funds can lead to sharp gains.
January 2000-July 2008: WTI Crude Oil and the S&P 500 Energy Sector ETF Produced Explosive Returns While the S&P 500 Total Return Index was Flat
Source: Stockcharts.com
The mid-2000s taught macro investors that a real estate boom can turn REITs into growth vehicles.
2003-2006: Real Estate Stocks Took Off Before the GFC
Source: Stockcharts.com
Even on a short-run basis, a Dynamic Macro Portfolio can include positions that rally when stocks plunge.
January 2020-March 2020: Long-Term Treasuries (TLT) and Gold (GLD) Rose as the S&P 500 Total Return Index Sank
Source: Stockcharts.com
January 2008-March 2009: TLT and GLD up Double Digits with the SPXTR –43%
Source: Stockcharts.com
Market Cycles Result in Ebbs and Flows of Outperformance
Source: J.P. Morgan Asset Management
Knowing When to Shift
This all looks great on historical charts, right? It’s not so easy in real time to produce positive risk-adjusted returns. Allio’s portfolio management team makes tactical shifts to position Dynamic Macro Portfolios based on risks and opportunities. Today, considering elevated valuation for US large-cap stocks, it’s more important than ever to have a global allocation with access to diversification tools.
JPMorgan notes that with a forward P/E above 22x, future returns for the S&P 500 are likely to be low if historical trends generally play out. That’s not a guarantee, but it’s a sobering probability most investors right now just seem to dismiss.
S&P 500 P/E Ratios and Forward Equity Returns
Source: J.P. Morgan Asset Management
A Dynamic Macro Portfolio changes as market cycles unfold. Today, valuations are rich for US large-cap stocks, but that’s where the earnings growth has been. It’s reasonable to see continued near-term outperformance from some of the past cycle’s winners, but we expect other asset classes to offer strong returns and even defensive benefits if and when the Magnificent 7, (Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL/GOOG), Amazon (AMZN), NVIDIA (NVDA), Tesla (TSLA), and Meta (META)), lose their luster.
The Bottom Line
Allio’s Dynamic Macro Portfolios are designed to participate in bull markets and offer defense in bear markets. As the global debt cycle evolves and amid rising geopolitical tensions, our team expects black-swan events to unfold with little warning. That would drive macro volatility and demand that investors be more nimble with their allocations. History proves that being dynamic and open to new ideas can work in both up and down markets.
Our curated and extensive menu of investments puts you in the driver’s seat to control your financial future. Allio users can add, remove, and rebalance investments for maximum personalization, all with the confidence of knowing that our portfolio managers will continually monitor their portfolios.
At the end of the day, macro matters most! If you want to stay ahead of the curve, it's time to take a macro approach to following policy and market shifts. Position yourself for success by signing up for the Allio Capital beta today and make sure you're always on top of the trends that matter most.
Dynamic Macro Portfolios: Protecting Against Black Swans
A dynamic portfolio empowers investors to quickly adapt to changing macroeconomic conditions. The modern financial world is filled with variables that pundits discuss non-stop in the news and on the blogosphere. It can be a lot for an everyday investor to take in without worrying about all that could go wrong. Regional wars, natural disasters, monetary policy missteps, fiscal irresponsibility, and soaring debt levels – all of these risks make it difficult to be assured that your investments are allocated properly.
Allio’s Dynamic Macro Portfolio is designed to put you, the investor, in the driver’s seat; you do not have to be relegated to sticking with a passive portfolio. Rather, the Dynamic Macro Portfolio can shift to today’s uncertain global catalysts. We give you the tools and technology to ensure your portfolio is best positioned to meet and exceed your goals.
“Dynamic” also involves a range of styles and an extensive menu of vehicles to express a certain macro view. Our portfolio managers will continually monitor your allocation to make sure it aligns with your long-term goals. We assert that two particular risks emerge today that threaten the viability of traditional investing: the debt cycle and geopolitical risk.
Why Now’s the Time to Be Dynamic
There’s no need to be dynamic in a world that regularly delivers compounded annual returns of 8-10% with low volatility. You could just shove all your money into an S&P 500 or global equity index fund and call it a day. Of course, we don’t live in that world. Though the average compounded annual total return for just about all diversified equity allocations is in the high single digits before taxes and inflation, the actual distribution of those returns is disparate.
Just take a look at the S&P 500 Total Return Index since 1928. According to data from NYU Stern, while the typical gain has been north of 11%, it’s highly unusual to see a “normal” year. A 20%+ rally or a 0% or worse fall is the more probable single-year outcome. Also, while 11.8% is the yearly average, when you compound returns over the decades the geometric return is a bit lower.
S&P 500 Total Return Index: Annual Returns Since 1928
Source: NYU Stern
S&P 500 Annual Returns and Intra-Year Declines
Source: J.P. Morgan Asset Management
The US Dominates Today, But That’s Not Guaranteed In the Future
Source: Goldman Sachs
Bull and bear markets abroad can make yearly gains and losses even more severe than what’s seen in the S&P 500 Total Return Index. While it’s true that adding foreign equity exposure can reduce volatility over the long haul, there are plenty of periods during which ex-US stocks merely serve to amplify what’s happening domestically in markets.
During the 2007-09 bear market, for instance, the S&P 500 Total Return Index lost 55%. Global diversification hurt since both the iShares MSCI EAFE ETF (EFA) and the iShares MSCI Emerging Markets ETF (EEM) plunged even more.
S&P 500 Total Return Index, EFA, EEM During the 2007-09 Bear Market
Source: Stockcharts.com
Including other asset classes and portfolio hedges could have helped to protect investors from such damaging losses, but that too may come at the cost of underperforming on the way back up. Adding, say, an aggregate bond fund, a gold ETF, crypto, exposure to Real Estate Investment Trusts (REITs), and overweighting the Energy sector are popular diversification tools.
Unfortunately, sticking with such a mixed allocation proves challenging when one or more areas inevitably experience its bout of negative alpha to stocks. The risk is that these model portfolios that many retail investors are shoved into sound great in theory, but don’t work well in practice because of both real-world underperformance trends and individual behavioral considerations such as the fear of missing out, loss aversion, and confirmation bias.
Diversifiers Sharply Underperformed the S&P 500 Total Return Index (2015-2024)
Source: Stockcharts.com
The Need to be Dynamic
Modern Portfolio Theory (MPT) also falls short due to the ever-present risk of black-swan events. Once again, a cookie-cutter allocation should do well if the world were always in balance and at peace. In recent times and throughout decades and centuries past, we find that unforeseen and unusual events happen all the time.
The dot-com bubble’s burst, 9/11, corporate accounting scandals, uprises in the Middle East, the Great Financial Crisis, the Fukushima nuclear disaster, the Cypress Crisis of 2013, Brexit, Donald Trump’s 2016 win, COVID-19, the UK’s gilt crisis of 2022, Tokyo’s Black Monday of August 2024 – this is a short list (just over the past quarter-century) of many events that had major implications for global markets.
How many of them were predicted by so-called Wall Street experts? Very few, and even those that were broadly forecasted, accurately gauging how markets would react was virtually impossible. While there’s no perfect solution, staying nimble with your investments and keeping your portfolio in line with your needs and goals is critical.
We take that to heart in how we form portfolios for everyday investors. Our tools, which include Allio’s Macro Dashboard, are designed to help investors keep an eye on geopolitical and financial risk to make sure they stay ahead of the curve.
The Debt Cycle and Geopolitical Risk in Today’s Investing Climate
Knowing that typical portfolios often fail investors when unexpected events rattle markets, it helps to understand what drives volatility. There are telltale signs of fragility in the financial system based on the debt cycle.
Quickly rising debt levels can turn a once-thriving economy into one tainted by high perceived risk. Governments often face pressure to inflate their way out of increasingly problematic debt burdens, thereby contributing to soaring consumer prices and restrictive monetary policy. High interest rates charged by both banks within a country’s borders and investors abroad can devolve a competitive economy into one that’s structurally challenged for decades to come.
We can look to history to find examples of the debt cycle causing fast economic unwinds: Germany in 1932, Austria in 1945, Vietnam in 1975, the Latin American Debt Crisis of the 1980s, Greece in 2012 and 2015, Russia in 1998 and 2022, and even the UK for a moment in 2022.
Each of these events had its unique aspects, but the underlying issue was government mismanagement of fiscal and monetary control. Leveraging an economy works well amid slow and steady growth. As volatility increases and the trajectory of GDP begins to rock back and forth, that’s when high debt turns from being a side story to front-page news.
Americans caught a glimpse of what the early stages of the debt cycle look like. In 2022, after years of negative correlations between stocks and bonds, the S&P 500 was suddenly taking its cue from movements in the Treasury market. When yields then spiked, it often meant bearish price action in equities, and that correlation persists through today.
With national debt rising at unprecedented levels, concerns grow that the federal debt burden may come home to roost before long. As of late 2024, the national debt approaches $40 trillion, driven by massive deficit spending the likes of which are usually only seen during recessions.
US Federal Net Debt History and Forecast
Source: J.P. Morgan Asset Management
Large Annual Deficits Appear to be the New Normal
Source: BofA Global Research
We have already seen interest rates respond. In late 2021 – well into the post-COVID economic recovery and with the aid of the Federal Reserve – yields were suppressed to under 1% on the 10-year Treasury.
Jump ahead to today, and the 3.3-5% range has held for many quarters on end. Stocks were hit hard in 2022 when rates launched higher, but as yields have stabilized, equities have done well.
10-Year Treasury Yield: Consolidating After a Sharp Increase
Source: Stockcharts.com
Indeed, stocks usually like stability in the bond market. What if, however, 2022 was merely the first leg up in a protracted period of rising rates? How might traditional risky assets perform if the 10-year yield jumps above 5%? Volatility would probably ensue. That would coincide with the next stage of the debt cycle for the US. You can imagine that with $40+ trillion of debt and perhaps a 6-7% cost to borrow - all eyes would be glued to happenings in the fixed income space.
A dynamic macro strategy can adjust to these kinds of broad shifts. That’s not to say that it will always produce gains, but there are trends of growing uncertainty regarding debt levels and the government’s ability to repay its financial obligations. It then seems prudent to dynamically allocate to areas like gold, bitcoin, oil, and inflation-sensitive spots that might help weather the potential storm.
Geopolitical Risk Rising
As mentioned at the onset, geopolitical risks are apparent. All it takes is for one global black-swan event to cause the debt cycle to accelerate. Inklings of that were felt during the first half of 2022 when Russia invaded Ukraine. The global economy was on thin ice amid high deficit spending across developed countries, with particular uncertainty in Europe. The invasion of Ukraine resulted not only in soaring oil prices around the globe but also serious energy-related risks in spots that depended on Russia for natural gas.
The US endured an inflation uptick, but companies and households across the pond feared not just for their financial security but also for their lives. Natural gas pipelines were closed and Europe, which had previously increased its dependence on unreliable renewable power. The potential for a deadly winter brought geopolitical fears into cold reality. While major loss of life was averted, the saga was just a single instance of how geopolitical developments can bring about black-swan risk.
Our team is constantly considering future black swans. Geopolitical tensions, financial crises, technological risks, environmental catastrophes, bioterrorism, and social unrest are just a handful of potential perils on the horizon. Markets seem to be on the same page in light of gold’s rally in the last few years and bitcoin’s resiliency. One thing we don’t expect is peace and tranquility among nations.
Dynamic Portfolios: Defensive During Downtimes, Opportunistic In Uptimes
The goal of a Dynamic Macro Portfolio is to protect against severe downside losses while still participating in bull markets, all so that you can meet your financial goals. When bear markets strike, owning assets that outperform protects against larger permanent losses.
For instance, during inflationary periods, including inflation-protected bonds, such as TIPS, in a portfolio can produce alpha versus nominal Treasuries.
June 2020-June 2022: TIPS ETF vs Nominal Treasury ETF: 18ppt of Alpha
Source: Stockcharts.com
Amid time or rising commodities, allocating to an oil ETF or other natural resource funds can lead to sharp gains.
January 2000-July 2008: WTI Crude Oil and the S&P 500 Energy Sector ETF Produced Explosive Returns While the S&P 500 Total Return Index was Flat
Source: Stockcharts.com
The mid-2000s taught macro investors that a real estate boom can turn REITs into growth vehicles.
2003-2006: Real Estate Stocks Took Off Before the GFC
Source: Stockcharts.com
Even on a short-run basis, a Dynamic Macro Portfolio can include positions that rally when stocks plunge.
January 2020-March 2020: Long-Term Treasuries (TLT) and Gold (GLD) Rose as the S&P 500 Total Return Index Sank
Source: Stockcharts.com
January 2008-March 2009: TLT and GLD up Double Digits with the SPXTR –43%
Source: Stockcharts.com
Market Cycles Result in Ebbs and Flows of Outperformance
Source: J.P. Morgan Asset Management
Knowing When to Shift
This all looks great on historical charts, right? It’s not so easy in real time to produce positive risk-adjusted returns. Allio’s portfolio management team makes tactical shifts to position Dynamic Macro Portfolios based on risks and opportunities. Today, considering elevated valuation for US large-cap stocks, it’s more important than ever to have a global allocation with access to diversification tools.
JPMorgan notes that with a forward P/E above 22x, future returns for the S&P 500 are likely to be low if historical trends generally play out. That’s not a guarantee, but it’s a sobering probability most investors right now just seem to dismiss.
S&P 500 P/E Ratios and Forward Equity Returns
Source: J.P. Morgan Asset Management
A Dynamic Macro Portfolio changes as market cycles unfold. Today, valuations are rich for US large-cap stocks, but that’s where the earnings growth has been. It’s reasonable to see continued near-term outperformance from some of the past cycle’s winners, but we expect other asset classes to offer strong returns and even defensive benefits if and when the Magnificent 7, (Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL/GOOG), Amazon (AMZN), NVIDIA (NVDA), Tesla (TSLA), and Meta (META)), lose their luster.
The Bottom Line
Allio’s Dynamic Macro Portfolios are designed to participate in bull markets and offer defense in bear markets. As the global debt cycle evolves and amid rising geopolitical tensions, our team expects black-swan events to unfold with little warning. That would drive macro volatility and demand that investors be more nimble with their allocations. History proves that being dynamic and open to new ideas can work in both up and down markets.
Our curated and extensive menu of investments puts you in the driver’s seat to control your financial future. Allio users can add, remove, and rebalance investments for maximum personalization, all with the confidence of knowing that our portfolio managers will continually monitor their portfolios.
At the end of the day, macro matters most! If you want to stay ahead of the curve, it's time to take a macro approach to following policy and market shifts. Position yourself for success by signing up for the Allio Capital beta today and make sure you're always on top of the trends that matter most.
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Disclosures
This material is for informational purposes only and should not be construed as financial, legal, or tax advice. You should consult your own financial, legal, and tax advisors before engaging in any transaction. Information, including hypothetical projections of finances, may not take into account taxes, commissions, or other factors which may significantly affect potential outcomes. This material should not be considered an offer or recommendation to buy or sell a security. While information and sources are believed to be accurate, Allio Capital does not guarantee the accuracy or completeness of any information or source provided herein and is under no obligation to update this information.
Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. Performance could be volatile; an investment in a fund or an account may lose money.
There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market.
Disclosures
This material is for informational purposes only and should not be construed as financial, legal, or tax advice. You should consult your own financial, legal, and tax advisors before engaging in any transaction. Information, including hypothetical projections of finances, may not take into account taxes, commissions, or other factors which may significantly affect potential outcomes. This material should not be considered an offer or recommendation to buy or sell a security. While information and sources are believed to be accurate, Allio Capital does not guarantee the accuracy or completeness of any information or source provided herein and is under no obligation to update this information.
Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. Performance could be volatile; an investment in a fund or an account may lose money.
There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market.
Disclosures
This material is for informational purposes only and should not be construed as financial, legal, or tax advice. You should consult your own financial, legal, and tax advisors before engaging in any transaction. Information, including hypothetical projections of finances, may not take into account taxes, commissions, or other factors which may significantly affect potential outcomes. This material should not be considered an offer or recommendation to buy or sell a security. While information and sources are believed to be accurate, Allio Capital does not guarantee the accuracy or completeness of any information or source provided herein and is under no obligation to update this information.
Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. Performance could be volatile; an investment in a fund or an account may lose money.
There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market.
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Allio Advisers LLC ("Allio") is an SEC registered investment adviser. By using this website, you accept our Terms of Service and our Privacy Policy. Allio's investment advisory services are available only to residents of the United States. Nothing on this website should be considered an offer, recommendation, solicitation of an offer, or advice to buy or sell any security. The information provided herein is for informational and general educational purposes only and is not investment or financial advice. Additionally, Allio does not provide tax advice and investors are encouraged to consult with their tax advisor. By law, we must provide investment advice that is in the best interest of our client. Please refer to Allio's ADV Part 2A Brochure for important additional information. Please see our Customer Relationship Summary.
Online trading has inherent risk due to system response, execution price, speed, liquidity, market data and access times that may vary due to market conditions, system performance, market volatility, size and type of order and other factors. An investor should understand these and additional risks before trading. Any historical returns, expected returns, or probability projections are hypothetical in nature and may not reflect actual future performance. Past performance is no guarantee of future results.
Brokerage services will be provided to Allio clients through Allio Markets LLC, ("Allio Markets") SEC-registered broker-dealer and member FINRA/SIPC . Securities in your account protected up to $500,000. For details, please see www.sipc.org. Allio Advisers LLC and Allio Markets LLC are separate but affiliated companies.
Securities products are: Not FDIC insured · Not bank guaranteed · May lose value
Any investment , trade-related or brokerage questions shall be communicated to support@alliocapital.com
Please read Important Legal Disclosures
v1 01.20.2025
What We Do
What We Say
Who We Are
Legal
Allio Advisers LLC ("Allio") is an SEC registered investment adviser. By using this website, you accept our Terms of Service and our Privacy Policy. Allio's investment advisory services are available only to residents of the United States. Nothing on this website should be considered an offer, recommendation, solicitation of an offer, or advice to buy or sell any security. The information provided herein is for informational and general educational purposes only and is not investment or financial advice. Additionally, Allio does not provide tax advice and investors are encouraged to consult with their tax advisor. By law, we must provide investment advice that is in the best interest of our client. Please refer to Allio's ADV Part 2A Brochure for important additional information. Please see our Customer Relationship Summary.
Online trading has inherent risk due to system response, execution price, speed, liquidity, market data and access times that may vary due to market conditions, system performance, market volatility, size and type of order and other factors. An investor should understand these and additional risks before trading. Any historical returns, expected returns, or probability projections are hypothetical in nature and may not reflect actual future performance. Past performance is no guarantee of future results.
Brokerage services will be provided to Allio clients through Allio Markets LLC, ("Allio Markets") SEC-registered broker-dealer and member FINRA/SIPC . Securities in your account protected up to $500,000. For details, please see www.sipc.org. Allio Advisers LLC and Allio Markets LLC are separate but affiliated companies.
Securities products are: Not FDIC insured · Not bank guaranteed · May lose value
Any investment , trade-related or brokerage questions shall be communicated to support@alliocapital.com
Please read Important Legal Disclosures
v1 01.20.2025
What We Do
What We Say
Who We Are
Legal
Allio Advisers LLC ("Allio") is an SEC registered investment adviser. By using this website, you accept our Terms of Service and our Privacy Policy. Allio's investment advisory services are available only to residents of the United States. Nothing on this website should be considered an offer, recommendation, solicitation of an offer, or advice to buy or sell any security. The information provided herein is for informational and general educational purposes only and is not investment or financial advice. Additionally, Allio does not provide tax advice and investors are encouraged to consult with their tax advisor. By law, we must provide investment advice that is in the best interest of our client. Please refer to Allio's ADV Part 2A Brochure for important additional information. Please see our Customer Relationship Summary.
Online trading has inherent risk due to system response, execution price, speed, liquidity, market data and access times that may vary due to market conditions, system performance, market volatility, size and type of order and other factors. An investor should understand these and additional risks before trading. Any historical returns, expected returns, or probability projections are hypothetical in nature and may not reflect actual future performance. Past performance is no guarantee of future results.
Brokerage services will be provided to Allio clients through Allio Markets LLC, ("Allio Markets") SEC-registered broker-dealer and member FINRA/SIPC . Securities in your account protected up to $500,000. For details, please see www.sipc.org. Allio Advisers LLC and Allio Markets LLC are separate but affiliated companies.
Securities products are: Not FDIC insured · Not bank guaranteed · May lose value
Any investment , trade-related or brokerage questions shall be communicated to support@alliocapital.com
Please read Important Legal Disclosures
v1 01.20.2025