If you were to look only at where the market closed out June, with the S&P (SPX) at just under 2100 (2098.87 SPX) and compare that to month-end for May (2096.96), you’d see that little had changed. Quarter-to-quarter, the rise from the Q1 close of roughly 2060 to the Q2-end is nearly a 2% gain. Q1 followed a similar pattern ending the quarter within 1% of where it began.
What that view fails to acknowledge, of course, is another quick, market-rattling event—this one known as “Brexit,” which caused a spike in fear and uncertainty again. Volatility increased and the major averages were sent swinging in 5-10% ranges. At its lows, SPX traded below 2000, declining nearly 5% in a matter of days.
But, here we are again, right back to previous levels (sound familiar?). As I noted in my previous post about Brexit being an event, the UK’s departure from the EU had little short-term impact on the current state of the economy, and markets will eventually reflect that reality.
Speaking of the U.S. economy, there have been some hopeful signs. The Chicago Business Barometer (also known as the Chicago Purchasing Manager Index) rose 7.5 points to 56.8 in June, the highest level since January 2015. The rise was attributed to strong gains in new orders and production. Further, the rebound in June offset the previous two months of weakness. The Chicago Barometer average for Q2 was 52.2, virtually unchanged from 52.3 in Q1.
Also widely anticipated was the June ISM Manufacturing Survey (released July 1), which came in at 53.2—beating estimates and posting a fourth consecutive month of growth.
That’s why, market “events” aside, Astor focuses intently on the economic fundamentals—especially through the lens of our proprietary Astor Economic Index® (AEI). Based on our reading of the current state of the economy we allocate assets accordingly. Although the AEI has declined over the past several months and our beta (exposure to risk assets) was adjusted accordingly, the Brexit “event” and aftermath of the past week did not change our overall view of the economy, or our outlook for the equity markets over the next few quarters.
To be clear, if fundamentals change we will adjust our asset allocation and our weighting of risk assets. But as of this writing, fundamentals are about the same as they were a few months ago. In fact, Q1 GDP was revised higher to 1.1%, compared to the initial reading of 0.5% and the second estimate of 0.8%. (Whether GDP has accelerated from the economy’s slowed pace of earlier this year will put the spotlight on the Q2 advance report, due to be released July 29.)
The conclusion we draw from all this further supports our thesis from earlier in the year: we are in a low-return environment. Low-risk assets such as 10-year treasuries are yielding less than 2%, and risk assets such as equities are on track for single-digit returns with double-digit volatility.
Given that outlook, we believe our portfolios are positioned to capitalize on this environment, while we remain prepared to make adjustments to become defensive should risks increase. At the same time, if economic fundamentals improve and risk assets appear likely to generate greater returns for the same risk, we will adjust to that accordingly as well.
Through whatever “events” might rattle the market from time to time, we continue to keep our eye on what really matters—the economy.
Rob Stein is the CEO of Astor Investment Management LLC, a registered investment advisor that provides advisory services to approximately $1.9 billion (as of March 2016) in client assets across various product channels, including separately managed accounts, mutual funds, and model delivery arrangements. Astor’s investment philosophy is based on the belief that diligent analysis of economic data can provide valuable signals for longer-term financial market allocations.
All information contained herein is for informational purposes only. This is not a solicitation to offer investment advice or services in any state where to do so would be unlawful. Analysis and research are provided for informational purposes only, not for trading or investing purposes. All opinions expressed are as of the date of publication and subject to change. Astor and its affiliates are not liable for the accuracy, usefulness or availability of any such information or liable for any trading or investing based on such information.
The Astor Economic Index® is a proprietary index created by Astor Investment Management LLC. It represents an aggregation of various economic data points: including output and employment indicators. The Astor Economic Index® is designed to track the varying levels of growth within the U.S. economy by analyzing current trends against historical data. The Astor Economic Index® is not an investable product. When investing, there are multiple factors to consider. The Astor Economic Index® should not be used as the sole determining factor for your investment decisions. The Index is based on retroactive data points and may be subject to hindsight bias. There is no guarantee the Index will produce the same results in the future. The Astor Economic Index® is a tool created and used by Astor. All conclusions are those of Astor and are subject to change.