Q3 GDP Beats Estimates

Q3 GDP Beats Estimates

Real GDP for Q3 2016 came in at a better-than-expected rate of 2.9%. This “advance estimate,” released by the Bureau of Economic Analysis, was above consensus/economists’ estimates of around 2.5-2.6%. In Q2, real GDP increased by an annualized rate of 1.4%.

As Astor previously observed, a Q3 GDP report that at least met expectations, along with follow-through in the ISM Manufacturing and Non-Manufacturing gauges, could be a good springboard for continued growth in Q4. This outlook also adds to the widely-held expectation, as previously noted, that the Federal Reserve will raise interest rates by the end of the year.

gdp-q3

Highlights from the report include:

  • Personal consumption expenditures rose 2.1% in Q3 vs 4.3% in Q2
  • Exports rose 10% in Q3 vs 1.8% in Q2
  • Other positive contributions were from private inventory investment, federal government spending, and nonresidential fixed investment. These increases were partly offset by negative contributions from residential fixed investment and state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased.

This advance estimate for Q3 GDP is subject to two more revisions. In Astor’s view, these revisions make the backward-looking GDP “headline” number less useful for making investment decisions than economic analysis using output indicators for the current quarter, as well as near-term trends in the economy.

The Q3 second estimate report is scheduled to be released on Nov. 29.

 

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.

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Passive Investing Grows in Popularity—But No Panacea

As the investing public, from institutions to individuals, moves away from stock picking and other traditionally active strategies, the beneficiary is passive investing.

As the Wall Street Journal reported recently, pension funds, endowments, 401(k) retirement plans, and retail investors are opting increasingly for passive investing that tracks an index. For the three years ended Aug. 31, investors added nearly $1.3 trillion to passive mutual funds and passive exchange traded funds (ETFs), while taking more than $250 billion from active funds, according to Morningstar.

Passive investment products can be powerful tools. But so is a chainsaw. In both cases, you need to know how to use them.

Passive investing may be appealing to some investors compared to traditional active investing such as stock picking, which is inherently difficult.

Investors who want to track market performance often prefer passive funds as a way to capture “beta” at a lower cost than active funds. In addition, traditional active funds often underperform their benchmarks.

Being too passive in one’s investing, however, is no panacea. For example, in a market downturn, a passive approach that “stays the course” through a correction in the broad market or a particular index can lead to significant drawdowns.

Another consideration, in our opinion, is that many passive index funds are market cap-weighted, with the biggest allocations going to the largest stocks in the index. That might lead investors to have greater exposure to a few stocks than they anticipated or desired.

A much better approach, we believe, is to focus on asset allocation. As a classic 1986 study published in the Financial Analysts Journal found, the potential return from “investment policy”—meaning, the selection of asset classes and how they are weighted—is the dominant determinant of portfolio performance. Investment strategy, such as picking particular stocks, was found to be much less of a determinant of performance.

At Astor, our fundamentally driven, macroeconomics-based approach focuses on asset classes—such as core equity holdings, fixed income, commodity, currencies, or real estate. We believe ETFs, which are low cost, transparent, and efficient, are the best instruments to provide this exposure. Moreover, we take a dynamic approach to asset allocation, as determined by the current trend in the U.S. economy, using our proprietary Astor Economic Index®.

We believe that when investors take a dynamic approach with a strategic holding (for example 20 percent of their overall portfolio) they can potentially gain the benefit of being more agile and responsive to economic conditions.) This is our approach to a ‘best of both worlds” strategy for being both passive and active, as advocated by some investment professions in the Wall Street Journal. 

At Astor, by putting our focus on asset allocation and with a finger on the pulse of the economy, our goal is to generate solid returns and mitigate risk, across the economic cycle.

 

 

 

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.

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The Tension between Reacting and Overreacting: One Number Does Not Make a Trend

In asset allocation and investing, there is a natural tension between reacting and overreacting. The goal is to ensure you are skilled at the former, while avoiding the latter.

At Astor Investment Management, we believe our macroeconomics-based approach to asset allocation helps us react to what we determine to be real change in the economic trend. We reduce equity exposure (beta) when the economic trend weakens, and increase equity exposure as the economic trend strengthens.

What we don’t do is react to every little wiggle in a particular number. We often try to make this point in discussions with clients who may want to know what a particular “headline number”—be it GDP or the unemployment rate—means for investing. Our answer is that one number doesn’t make a trend. Rather, we use our proprietary Astor Economic Index® (AEI) to guide our asset allocation decisions.

To learn more about how the AEI guides our asset allocation decisions, watch this.

The AEI is designed to take a series of employment and output data and aggregate them into a single number. We think of this approach as taking a snapshot, in real time, of the economy; it is a “now-cast”—not a forecast—because we believe it is not possible to forecast recessions. The often-quote joke in finance (attributed to Nobel laureate and economist Paul Samuelson) is that the stock market has predicted something like nine out of the last five recessions.

Instead, we use AEI to gauge the strength or weakness of the current economic trend and then invest accordingly. We predicate this approach on a central insight drawn from our research into nearly 100 years of stock market returns, dividing those years into months when the economy was in expansion on the first day of the month and months when the economy was in recession on the first day of the month. On average, during periods when the economy was expanding, the stock market gained an average of 90 basis points (0.9%) per month. Conversely, when the economy was in recession, the stock market lost an average of 75 basis points (0.75%) per month.

These research findings underscore the importance of gauging and reacting appropriately to the economic trend. For example, when we are confident that the economy is in recession, as indicated by the AEI, we steadily and quickly reduce equity exposure and add more fixed income. During times when the economic trend is positive, we typically add equity exposure.

But we don’t make such moves arbitrarily or in reaction to one or two numbers. We use the AEI as a powerful tool for asset allocation and to help us stay the course even when the stock market appears to be overreacting to some number—for example, during stock market drops that are likely to be transitory during economic expansions. The stock market might sell off sharply for a short time, but if we see no change in the economic fundamentals, we will stay the course. In those instances, when the stock market comes back a short while later, we’ll give ourselves a little pat on the back for protecting our clients by avoiding overreaction. We don’t take credit for being “right”; rather, we credit the AEI and the discipline it infuses.

The most important investment decision, of course, is determining the ratio of stocks and bonds. At Astor, our rationale is driven by economic fundamentals. By using the AEI, we can discern the economic trend through the noise the data.

 

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.

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What Are You Looking At?

Fed-watching. Oil prices. The latest geopolitical headline. All sources of anxiety, some of them manufactured. The real question is, what should you be focusing on?

Even as markets persist near all-time highs, volatility not indicating too much concern, the subconscious anxiety appears to be growing. As we’ve seen in recent years (and, more recently, during Brexit) any number of things can create uncertainty in the market and cause investors to make a kneejerk reaction. The key is avoiding that.

Such event-driven market gyrations raise the questions about how investment professionals and their clients should make portfolio decisions. How you construct your portfolio goes a long way in how you view market activity. While there is no shortage of so-called rationale for buying and selling (as the cable TV pundits will attest), solid portfolio allocation decisions require equally solid rationale.

In other words — What are you looking at?

Investors who don’t make investment decisions based on specific rationale are more apt to put their money on the line based on what they think/hear or, worse yet, on attempts to time the market. The New York Times recently highlighted the potential danger of such an approach: “By buying and selling too frequently and at the wrong times and not benefiting fully from compounding, people typically do even worse than they would have done if they simply held on to their investments.” Investors get penalized for being reactionary. The less fundamental and the more ad hoc their reasoning for making asset allocation decisions, the more susceptible investors will be to react to market noise.

We believe a macroeconomic-driven asset allocation, at least for a portion of portfolios (i.e., the strategic or dynamic holdings—typically 20%), make the most sense for investors to construct portfolios that are adaptable to the current environment, while also maintaining their focus on long-term results. After all, corporations focus on economic trends. The Fed focuses on economic trends. Why wouldn’t investors?As a fundamentally driven asset allocation firm, we’ve made our careers determining why economic data matter—what data points mean and where the economy is going. Our macroeconomics-based approach is all the more important in today’s evolving capital market landscape, with potentially changing risk and return dynamics, from fixed income and more assumed risk in traditionally allocated portfolios. As we observe, in these conditions, investors are taking on more risk to pursue the same return.

For example, in today’s investment environment, realistic fixed-income return targets are becoming harder to achieve without taking on more risk. The choice for many investors has been to take on more risk for the same yield‘(1):

  • In 1995, a 100% portfolio allocation to Treasury Bonds would have an approximate 7.5% target return, with a 6.5% standard deviation.
  • In 2015, to have a 7.5% target return:
    • Treasury bonds were reduced to 12% of the portfolio
    • Equities were almost two-thirds of the portfolio
    • The standard deviation for the target 7.5% return portfolio rose to more than 17%

‘(1) Source:  Wall Street Journal/Callan Associates: http://on.wsj.com/1XN7VyS

 Without a rationale grounded in the fundamentals, investors potentially could make risky decisions without having a good reason—or worse, decisions that are not in line with their risk tolerance, which will put more emphasis on managing risk for the foreseeable future. This adds more weight to have a good answer to the question: What are you looking at?

At Astor, we believe the only acceptable answer is the economic fundamentals. That’s what matters when you’re focusing on what matters to you.

 

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.

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