The Impact of Short Term, Incremental Improvements On Long-Term Success

January 31, 2024

You can't connect the dots looking forward; you can only connect them looking backwards.

—Steve Jobs

During numerous discussions with our financial advisor partners during recent months, the notion of “all-time highs” has surfaced. Often, these highs are perceived as a harbinger of downturns. However, we believe the evidence points to a contrary conclusion.

In January we saw the S&P 500 achieve four all-time highs, surpassing the previous peak from January 2022. In the context of market history, a span of a few years may seem minor, but enduring 512 days beneath the previous all-time high can be challenging for clients — not only psychologically, but also in terms of their long-term compounding potential.

Since 2013, a period widely recognized as a great period for stocks in the U.S., the S&P 500 notched 351 ATHs. This tally spans a broad range, from the 70 highs in 2021, to just one in 2022, and none in 2023. This is in stark contrast to the period from 1930 to 1953, which saw no new highs at all. To put it differently, the ATH high from 1929 stood unchallenged until 1954! Could it be that the absence of ATHs is the actual omen of tougher times ahead?

Our analysis, which is viewed through the lens of trend following, suggests that trends, whether ascending or descending, tend to perpetuate themselves. That said, sometimes “but this time is different” actually proves to be true, and during these times we rely on trend data and pre-determined exit strategies to remove exposure, which can allow us to live and fight another day.

In this month’s Co-Founders’ Note, we discuss how small improvements over time can lead to big results in the long term. We point to not only our systematic investing process, but also our process for operating our business on a day-to-day basis. Systematic thinking permeates everything we do at Blueprint Investment Partners and is a core value of the firm.

But first, here’s a summary of our take on what transpired in the markets in January.

Sourcing for this section: ICE, S&P 500, 12/30/1927 to 1/29/2024

Asset-Level Overview: Market Talking Points for Financial Advisors

Equities & Real Estate

For the S&P 500 Index, 2024 began the way 2023 ended, with the largest technology and growth companies rallying. The moves were enough to push the benchmark large-cap index to a new all-time high for the first time since the opening trading day of 2022. As was also customary during 2023, other segments of the market lagged: value, dividend, mid, and small caps. The latter two have struggled to even hit positive territory as the month comes to a close. For February, Blueprint Investment Partners portfolios will generally see a small decrease to U.S. equities but remain overweight.

Looking abroad, foreign equities have lagged their U.S. large-cap counterparts. In developed economies, monthly losses appear to be imminent even though trends continue to be positive. In emerging economies, things are bleak, with economic weakness in China continuing to drag EM equity assets lower. In fact, allocations to emerging market equities in Blueprint Investment Partners portfolios will return to their minimum due to downtrends over all meaningful timeframes.

Real estate securities paused their rally, coinciding with talk of peak interest rates, while declining for the first time since October. Despite some losses in January, the overall picture for the asset class has not changed, as the upward trend continued. However, another month of declines could be enough to move allocations from baseline to underweight.

Our Asset Allocations

Fixed Income & Alts

Like real estate, fixed income generally experienced retracements in January, as market sentiment about the timing of rate decreases shifted out a bit further. From a price perspective, the strongest areas of the yield curve continued to be on the short-end, with longer-duration bonds being the weakest. International Treasuries and inflation-protected bonds performed virtually in lockstep. Allocations in our portfolios will increase slightly, but trends could easily shift in the coming months, particularly for longer-duration bonds.

Like most assets outside of U.S. large-cap equities, gold prices were down in January, but trends continue to be positive as January ends. As a result, exposure in our portfolios will not change and will remain at the baseline allocation.

Our Asset Allocations

Sourcing for this section: ICE, S&P 500, 1/1/2021 to 1/29/2024; Barchart.com, Midcap ETF Vanguard (VO), 1/1/2024 to 1/26/2024; Barchart.com, Smallcap ETF Vanguard (VB), 1/1/2024 to 1/26/2024; Barchart.com, Real Estate Vanguard ETF (VNQ), 1/1/2023 to 1/29/2024; Barchart.com, 1-3 Year Treasury Bond Ishares ETF (SHY), 1/1/2024 to 1/26/2024; Barchart.com, 3-7 Year Treas Bond Ishares ETF (IEI), 1/1/2024 to 1/26/2024; and Barchart.com, 20+ Year Treas Bond Ishares ETF (TLT), 1/1/2024 to 1/26/2024

3 Potential Catalysts for Trend Changes: Giving Clients the Context

Strong GDP: The recession forecasted by many economists never showed up in 2023. American consumers made sure of it. During the past year, the U.S. economy grew 3.1%, which encompasses a seasonally- and inflation-adjusted 3.3% pace during Q4. A resilient labor market supported strong consumer spending and helped avert a downturn.

Labor Supply/Demand: Many workers came off the sidelines to join the labor force in 2022 and 2023, which eased labor shortages and put downward pressure on wage growth. However, additional gains may be difficult to achieve. This is important because inflation remains above the Fed’s 2% target, even though we saw a major retreat last year. The participation rate, which is the share of Americans who are in the labor force, has essentially held steady since August. If labor supply does not increase, the fight against inflation might require an easing of demand or weaker growth.

Credit Issues: Consumers are putting more purchases on credit cards and taking longer to pay them off. The four biggest banks in the U.S. reported higher credit card spending in 2023 versus the previous year. Unpaid balances surpassed 2019 levels for the first time, an indication consumers are putting more on their credit cards and taking longer to pay off their bills than they did before the pandemic. Additionally, delinquency rates have continued to slowly rise since 2021.

Sourcing for this section: The Wall Street Journal, “What Recession? Growth Ended Up Accelerating in 2023,” 1/25/2024; and The Wall Street Journal, “Labor Supply Helped Tame Inflation. It Might Not Have Much More to Give.” 1/21/2024

Consistency Compounds

Plans are nothing; planning is everything.

—Dwight D. Eisenhower

January is commonly a time of resolutions and goal setting for society at large, as well as Blueprint Investment Partners. For us it’s less about resolving to do something better out of frustration about failed expectations. Instead, it is part of a thoughtful, systematic process for running our business and delivering value to our partnering advisors.

An example of this process is how members of our Leadership Team have access to a personal performance coach. Our coach, Ray Reuter, annually encourages us to complete a “The Perfect Year” plan. This written document encompasses all the known items that, when achieved, would lead that person to have the perfect year. This plan can be a combination of professional, personal, and even family goals – nothing is off the table. Quarterly check-ins with Reuter are meant to keep each of us on track.

Importantly, Reuter was an advocate for our decision to implement the Entrepreneurial Operating System (EOS) at our firm several years ago. Learning about EOS helped us implement a variety of processes that we use to make progress on quarterly, annual, three-, and 10-year goals.

The result is that Reuter has been instrumental in helping Blueprint Investment Partners accomplish organizational goals, while our team members recognize, enhance, and contribute according to their strengths.

The methodical approach our firm and team members take toward achieving goals aligns with one of the sayings we use frequently: “It’s better to be consistently good than occasionally great.”

This saying can take on a variety of applications, but one meaning we favor is that it is better to repeatedly execute in hopes of small benefits that stack over time rather than looking for a shortcut to success. In other words, we would rather design simple processes than can be persistently implemented in all environments by all team members instead of complicated ones with high reward but high variability of outcomes (i.e., elegant > complex).

So how does this relate to the markets and client portfolios? In our mind, it’s that we’re now seeing the long-term fruits of our methodical approach to making allocation decisions.

Meb Faber, a fellow tend follower, recently noted an interesting idiosyncrasy between U.S. and international equities. To paraphrase, since 1950 most of the outperformance of U.S. equities over their global counterparts has occurred since 2009.

Since the inception of Blueprint Investment Partners about 10 years ago, our portfolios have generally been tilted in favor of U.S. equities relative to international. The performance benefits created by these deployments of capital are minor when evaluated over 30 days and are even harder to spot when one mistakenly compares the portfolio’s performance to an incorrect benchmark, such as the S&P 500 or Dow Jones Index. However, consistently overweighting U.S. equities over the long term has, we believe, allowed us to steadily reap these harvests of outperformance, which can compound in a big way over time for those who are willing to be a little different than the mainstream.

Coupling those rewards with the fact that they are produced in a way that is dispassionate and unemotional should be comforting for financial advisors, who have the task of helping clients reach their goals without any knowledge of what the next 30-40 years will look like (or even the next 12 months).

The year that just ended is a prime example of how unknowable the future is. Throughout the year, we had some advisors tell us they were unable to capitalize on the opportunities the year presented due to fear about recession, pundit predictions, and a litany of other reasons. Chasing constant greatness got in their way, prohibiting them from experiencing consistently good.

In our experience, consistently good has served Blueprint Investment Partners well over the years. At first, we were focused on delivering systematic investing strategies exclusively through separately managed accounts. We’ve evolved and now implement systems not only within our strategies, but also in our service model and how we plan and execute all phases of the business. In 2024, the only resolution we have is to continue consistently executing the systems that have gotten us to this point, while looking for ways to expand systematic thinking into new areas that serve our partnering advisors. We have planned “The Perfect Year” for our firm, and our sights are set on helping advisors deliver on theirs.