Is This Really a “Trump” Rally?

 

The latest market surge, as the Dow powers toward 20,000, is being called the “Trump stock market rally.” But as an economist and a realist, I have to question whether stocks would rally this much just on hope and expectations for a new administration, without the help of some other catalyst.

Granted, since the election, moves in the stock market have been significant: the Russell 2000 index of small-cap stocks has gained about 20% and the S&P 500 about 8%. Conversely, bond prices have taken a beating, although no one is calling that the “Trump Bond Dump.”

S&P (SPX) 3-Month Chart with 200-day simple moving average (Source: Wall Street Journal)

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As I dig deeper into the stock market rally, I believe there is another explanation for the most recent strong upward move in equities. For one thing, we are no longer barraged by the election drama. Uncertainty is gone; we know who won. Minus uncertainty, the market can shake off fear and resume its trend that, prior to the election, had been upward. (Recall that we were at previous all-time highs in the S&P this past summer, propelled higher by an improving employment picture.)

My point here is not to be political. Politics and economics are two very different animals who have to play nice in the jungle. But I do believe that this rally would have occurred no matter who won the election, based on the strength of the current economic fundamentals.

This is not meant to take anything away from President-elect Trump’s plans. Some investors are interpreting the Trump agenda as being supportive of the economy. There are some proposals, however, that could hurt stocks, such as limitations on international trade. In addition, increased spending and lower tax revenue could lead to a larger deficit, while policies that could lead to accelerated interest rate hikes would make it harder for corporations to float debt. And for all his ideas that could stimulate growth (e.g. infrastructure investments) at least in the short run, keep in mind that it takes a lot for anyone to execute a plan into action.

As an aside, it’s interesting to note how names get associated with certain things to describe or define them in some way. Think Watergate of the Nixon era; now any conspiracy or controversy is the next “Something-Gate”—immediately conveying a meaning, and a negative one at that. Health care reform—officially known as the Patient Protection and Affordable Care Act—is nicknamed Obamacare for the president who made it a policy hallmark. Ronald Reagan’s economic policies were dubbed Reaganomics. And the list goes on. Now, as we head to Inauguration Day in January, Trump appears to have his first label whether he deserves full credit for it or not: the Trump stock market rally.

But let’s be clear: This rally, as I see it, is not just built on hopes for what might happen with the new administration. Rather, it reflects what is already happening, namely improvements in economic fundamentals. The Astor Economic Index® (AEI) is showing the economy growing at an above-average rate.

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Unemployment continues to drop, with a current rate of 4.6%, the lowest level since mid-2007, while wage growth has also been rising steadily. GDP has improved, particularly in the second half of the year. Inflation, which has been negligible, is moving toward the Federal Reserve’s 2% target. And, the Federal Reserve appears to be giving a vote of confidence to the economy with a widely expected short-term rate hike. Globally, the economic picture appears to be bottoming out after a prolonged period of malaise, and growth is starting to tick up.

No matter what the stock market rally is called or who gets credit for it, I believe it’s important to view it in the context of fundamental realities: U.S. economic growth is accelerating, an environment that we, at Astor, believe to be supportive of buying stocks and other risk assets.

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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Revisiting Active Investing: Is the Trend in Passive Over?

Over the past few years, financial advisors and their clients, in search of low-cost ways to capture market performance, have piled into passive investment strategies. As the Wall Street Journal reported recently, for the three years ended Aug. 31, 2016, nearly $1.3 trillion flowed into passive mutual funds and ETFs. For investors, it seemed like a “no-brainer” move in a low-risk, low-volatility environment, with an upward trend for equities.

For years, I’ve been advising investors not to pay up for “beta”—that is, market exposure that is far easier and cheaper to capture with an ETF that seeks to replicate the S&P 500 or another index. But the rush to jump into passive and dump active may have thrown out the proverbial baby with the bathwater. There is growing evidence that active investing is coming back into favor. As Barron’s reported, since July 1, 60% of actively managed funds are beating the S&P 500, the highest level in nearly two decades.

At Astor, we believe now may be the opportune time to revisit active strategies that might not be the lowest cost, but may be meaningful in helping investors achieve their portfolio goals. For example, the Astor Dynamic Asset Allocation Strategy (formerly known as Long/Short Balanced) has outperformed the HFRI Total Macro Index for every year but one, and has posted a higher cumulative performance, such as for the past 3, 5 and 10 years (See Exhibit 4: Performance )

Not an ‘Either-Or’ Choice

To be clear, I’m not suggesting that passive’s time has passed; however, it appears to be getting long in the tooth, with signs of becoming a “crowded trade,” given the amount of money piling into passive funds, as the chart below indicates. (Source: The Wall Street Journal)

actively-departing

While investors may still benefit from having a portion of their portfolios dedicated to cheap beta, we believe active investing has a role to play in overall portfolio strategies. In fact, active investing, in our view, could very well be an answer to the essential question for investors (one that has become muted in the rush to passive investing): What is my long-term portfolio objective?

This question has become more relevant because, as we have observed, investors are taking on more risk with less professional input and guidance. In our view, this is reminiscent of the herd stampeding into tech stocks in the late 1990s, just before the 2001 recession—a time when a diversified portfolio of anything other than tech stocks would have weathered the storm.

To be clear, the current spotlight on active investing is not due to the surprising outcome of the U.S. presidential election and increased volatility of global equity markets. However, greater uncertainties and perceptions of increased political risk in the US and abroad are raising questions in investors’ minds, especially about potential changes in economic and political policies. At Astor, we have heard from many investors who are asking such questions. As we’ve found, investors who had piled into low-volatility and passive strategies wanted guidance and interaction with professional managers. And robo-advisors with their static portfolios don’t call you up to discuss long-term trends that may be impacted by a new president or changes in policies, interest rates, and so forth.

Our message to investors echoes our fundamentally-driven approach. At Astor, we use our proprietary Astor Economic Index® to identify the current economic trend and then make portfolio allocation decisions accordingly. We augment equity holdings with fixed income as we dial risk up and down. Furthermore, we allocate to additional non-equity assets that we believe will benefit from long-term market trends that are often hard to capitalize on with static or passive strategies.

Taking a dynamic approach allows investors to be more mindful of opportunities among asset classes or sectors. We do not advocate market timing, trying to pick tops and bottoms; however, we do believe that greater flexibility may be key to identifying those sectors that are more likely to perform favorably over the next several quarters or years. In fact, we believe there could be significant differences in performance from sector to sector.

Already we are seeing divergence in performance among styles and sectors. Small cap stocks are having a good run of late, while technology stocks are lagging. International markets are moving with in line with developed economies, while emerging economies are struggling. Risk premiums are changing around the world and among asset classes. Non-equity assets such as gold, currencies, and high-yield bonds are behaving in potentially diversifying and accretive ways. Investors holding fixed income investments should be mindful of rising interest rates, higher inflation, and yield curve fluctuations. Opportunities in metals, currencies, and international holdings should be considered for both diversification and the potential to generate a positive return through dynamic asset allocation.

While passive investing still has its place, in our view the time has come, once again, for taking a more dynamic approach to asset allocation as part of overall diversified portfolio solutions.

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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Politics and Economics: Linked—or Not?

A U.S. presidential outcome, one way or the other, likely will lead to some extrapolation of how economic policies might change—for example, higher/lower taxes or changes/continuation of trade policies—and, therefore, the impact on the stock market. But such policy changes take time; consider the agonizing on Capitol Hill over passage of major legislation, such as health care reform. Additionally, this involves a series of predictions: who will win, what policy changes may be made, and the outcome of such polices. So many places to get it wrong—I wouldn’t touch it.

According to conventional political and economic wisdom (there must be an oxymoron in there somewhere), the stock market presumably does better under Republicans than Democrats. Yet some studies suggest the inverse.

And because there is no shortage of opinion in politics or economics, there are some who say the economic benefits of one administration may not surface until a change in the Oval Office. Consider the theory touted in some circles that the expansion in the economy during the tenure of President Bill Clinton (1993-1997, 1997-2001) was due, at least in some degree, to the Reaganomic theories of the 1980s still trickling down through the economy. Whatever one’s view, there are plenty of data to back up either side.

More important, and the basis of our portfolio decisions at Astor, is the current state and the direction of the overall economy. “Now-casting” the current state of the economy, using our proprietary Astor Economic Index®, we feel, is more telling of the likely short-term direction of stocks than most data, including election results. While the index could be stronger, and has been stronger earlier this year, it is still decidedly positive.

Interesting to note is that the prevailing economic trend might have some role in who gets elected (versus who gets elected impacting shorter-term movements in stock prices), as indicated by election prediction models that consider some measure of how the economy is doing. The thought is that if the economy is going strong in the six months or so before the election, history suggests the party currently in the White House will win. If the economy is acting poorly, then the opposing party has a better shot. But it doesn’t work that way all the time, in the case of the Bush-Gore contest in 2000 when, according to one observer, “the economy favored Al Gore—but Bush won.”

What all of this leads us to believe is that while there may be some links, at least psychologically, between politics and the economy, the bigger and more impactful thing to watch is the $18 trillion U.S. economy.

As economists, we at Astor keep our finger on the economic pulse. Based on our study of the stock market over nearly 100 years, we believe the prevailing economic trend to be the best gauge of how and where to invest. Based on our research, we believe that periods of economic expansion tend to favor exposure to equities (beta), while periods when the economy is contracting or in recession do not favor equities and may be more appropriate periods for holding fixed income and/or even inverse equity positions. After determining the prevailing U.S. economic trend, we allocate assets accordingly, using exchange traded funds (ETFs) to take advantage of the transparency, liquidity, and variety of these investment instruments.

Any ebb and flow in the polls from now until Election Day (and even beyond, depending upon reaction to the outcome) could impact the stock market with its time-honored tradition of “climbing the wall of worry.” Worry pushes down asset prices, while euphoria sends them upward.

At Astor Investment Management, we are not in the business of forecasting presidential elections—nor do we focus on the worries/euphoria du jour. We keep our eye on the economic fundamentals, which we believe have far more impact on the market than who wins the election or any short-term fluctuation in opinions and emotions. And as of this writing, it still appears in our view that having exposure to stocks has a positive expected return.

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.

An ETF is a type of Investment Company which attempts to achieve a return similar to a set benchmark or index. The value of an ETF is dependent on the value of the underlying assets held. ETFs are subject to investment advisory and other expenses which results in a layering of fees. ETFs may trade for less than their net asset value. Although ETFs are exchanged traded, a lack of demand can prevent daily pricing and liquidity from being available.

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The Answer to the Question on Investors’ Minds: Stay the Course

For much of the year, beginning in January when the stock market had its worst start of a new year in history, we’ve been asked periodically why our portfolios haven’t been materially more defensive. The question has arisen at other times during the year, such as in aftermath of the UK’s “Brexit” vote, an event that temporarily took the market lower because of fear and uncertainty, but did not change the fundamentals. Now, some are wondering if the economic expansion could be getting long in the tooth.

Add to that the cable news chorus that, from time to time, warns investors that the next bear market is right around the corner (cable news pundits have called about five of the last two recessions).

And yet, here we sit, at or near all-time highs in equities.

For us, it’s a pretty straightforward proposition, thanks to the Astor Economic Index®, our proprietary, data-driven guidepost that allows us to determine, in real time, the direction and strength of the U.S. economy. Thanks to this “now-cast,” we are able to aggregate a variety of data into a single value, which we compare to historical levels and historical averages to determine whether we believe the economy is expanding or contracting and to what degree of strength or weakness.

The AEI is our answer to “the” question we believe is foremost on investors’ minds: What is the current state of the economy and its implications for exposure to risk assets?

As a robust aggregation of what is occurring across the $17 trillion U.S. economy, the AEI is our guide for determining risk asset allocation. Research shows that when the economy is growing, it is productive to hold risk assets (i.e. equities); when the economy is contracting, risk assets should be reduced. This is not prognostication—it’s now-casting, to capture the current state of the economy.

AEISource:  Astor Calculations

Since the economy turned the corner after the last recession—whether measured by the National Bureau of Economic Research (NBER), the Astor Economic Index®, or even your own “gut feel” of when things got better after the 2008-2009 financial crisis—the economy has been growing. As the AEI chart (above) illustrates, there have been points during this recovery when economic growth has been faster or slower. But at no time since the recovery has the AEI suggested that the expected return on risk assets was negative.

Not that there haven’t been some times of concern, when caution seemed prudent, such as the 2011 debt ceiling crisis and fears of a U.S. government default. But once those clouds cleared, downturns proved temporary and the financial news media’s repeated calls for a bear market were only head fakes.

The caveat, of course, is that some times are riskier than others; from time to time some assets and sectors do better than others. For example, earlier this year a slower pace of economic growth (but growth, nonetheless) suggested that we reduce beta somewhat in our portfolios, which we did.

Nonetheless, as the AEI chart shows from 2012 to the present, generally speaking risk exposure to risk assets (equities) has paid off, with the exception of a quarter or two. Our data-driven, fundamental approach, however, doesn’t attempt to capture short-term moves, quarter to quarter. As we tell clients, our goal is to generate solid, long-term returns, but our discipline is focused mainly on mitigating risk and protecting the downside. We attempt to give investors what we call “a smoother ride” through the cycles. Interestingly, this theme was featured in a recent Wall Street Journal’s report on the desire of investors for “peace of mind” by controlling volatility. When investors know what they want they can pursue their investment goals accordingly. A fundamentally-driven, macroeconomics-based approach, we believe, is the key to staying disciplined in the pursuit of those investment objectives.

For now, the AEI tells us to stay the course with exposure to risk assets. One day, presumably, that will change—and when it does, we will act accordingly.

 

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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June/Q2 Recap: Beyond Market-Rattling Events, the Data Prevail

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.

 

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Brexit Fallout Puts Next Round of U.S. Economic Data in Spotlight

As fallout from the Brexit vote continues to be felt—most acutely in currency and confidence—attention on this side of the pond turns to the next round of economic reports for clues as to how the U.S. economy will withstand the inevitable headwinds from the event.

From a market perspective, Brexit is best understood as an event—one that has sent the stock market down sharply and caused bond yields to plunge. Our research has shown that markets tend to recover from “events” if economic fundamentals are solid. This “if” is putting even more emphasis on upcoming data on employment, GDP, and manufacturing.

Before Brexit, our proprietary Astor Economic Index® (AEI) has shown growth in the U.S. economy, although there has been some minor slowing over the past several months. Obviously the Brexit vote, itself, has not had any fundamental effect on the economy; the process of Britain’s exit will be both complicated and prolonged. However, there have been undercurrents of concern voiced about the recent pace of U.S. economic growth, including by  Federal Reserve Chair Janet Yellen in her recent testimony before Congress.

To be clear, our AEI reading has not signaled any warnings about an economic downturn or recession. The economic “arrows” have been pointing upward, although to a lesser degree than in previous months. Any significant change in the angle of those arrows going forward, indicating the economy is slowing further, would mean the market likely faces a much tougher time recovering.

Rather than dwell in the land of “what-ifs,” economic data gives concrete evidence of what is happening now, which is far more significant for the nearly $18 trillion U.S. economy than any projection. Data will help clear the uncertainty that has swirled in the wake of the Brexit vote, the results of which took many by surprise and triggered a wave of remorse, as more than 3 million British people signed an official online petition for a “do-over” vote. Amid shaken confidence, investors and business leaders alike are raising questions about a slowdown and even a possible recession in Britain, the impact on the European economy, and fears for global economy overall.

On the currency side, since the Brexit vote the British pound has come under intense pressure, as the sterling has fallen to its lowest level versus the U.S. dollar in more than three decades. The British government announcement that it has put in place “robust contingency plans” to deal with the financial aftermath of the Brexit vote thus far has done little to stop the sterling’s decline.

If the U.S. dollar resumes its rally from 2015, that could cause an additional slowdown in U.S. exports. Likewise, a strong dollar would further pressure U.S. manufacturing—which brings us to the economic data to be released starting later this week.

The manufacturing sector has been faring somewhat better since its downturn last fall and winter, with May logging the third consecutive month of growth. Whether June has continued that growth will be closely watched when the Institute for Supply Management (ISM) manufacturing report is released on Friday, July 1.

Also in the spotlight will be the Employment Situation for June, scheduled to be released on Friday July 8. The big question here is whether hiring has picked up after May’s disappointing report that showed nonfarm payroll employment increased by only 38,000. The Federal Reserve, in its decision not to increase rates at its June meeting, has trained its sights on the employment number, as has much of the market.

Later in the month, on July 29, we will get a first look at Q2 GDP with an advance reading for the quarter. This will be eagerly awaited given the slowdown in Q1 to 1.1%, the weakest pace in a year. While slow, Q1 output was raised from earlier readings for the quarter of 0.5% (advance) and then 0.8% (second estimate).

Amid the uncertainty and speculation about various “what-if” scenarios—from whether the British will have a “re-do” vote, to whether there will be other “exit” referenda in the EU—economic data provide the proverbial ground to stand on. That’s why our investment philosophy is grounded in assessment of economic fundamentals, to determine the appropriate weighting of risk assets (i.e. equities) within a portfolio given the current state of the economy. It makes far more sense in our view to deal in the reality of economic fundamentals than to rely on projections of what might occur, when and how.

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.

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The Brexit ‘Event’: Uncertainty and Volatility But Not the Dot to Connect to a U.S. Economic Downturn

News that the U.K. voted to leave the European Union sent a shockwave through the markets, which reacted—as markets do—to the unanticipated with a sharp selloff from the Nikkei to the FTSE 100, with the U.S. markets opening sharply lower [down about 3% at the time of this post].  Given that polls had predicted the U.K. would remain in the E.U., continuing its 43-year association, the event disappointed the market, which had rallied earlier on prospects of the union remaining intact. Of note, the S&P finished last week at the 2050 level and 30 days before that at about the 2050 level and ironically finished the first quarter of 2016, you guessed it, around 2050. With the rally earlier this week into the vote being evaporated, it will be interesting to see what price the S&P closes at for this week and this month and quarter end.

As historically or politically significant this event is, even with the U.K. Prime Minister David Cameron resigning, it is still an “event.” Unless this event leads to some change in economic fundamentals in the U.S., the long-term outlook remains positive for U.S. equities.

Investing based on events is challenging, requiring a good deal of luck. Several studies put event-investing into context by explaining correctly that events typically trigger a rush for protection.  Investors sell risk assets like stocks and buy low risk or no risk assets like cash or Government bonds.  Our research has shown that markets tend to recover from “events” if economic fundamentals are solid. Furthermore, to the extent that uncertainty is the main cause of U.S. stock losses, we believe that factor will dissipate over time.

As of today, our read on the economy based on our proprietary Astor Economic Index® (“AEI”) still supports a meaningful weighting in U.S. stocks. To be clear, if economic fundamentals were below long-term and shorter-term trends, risk assets would have a challenging time recovering. But if that were the case, we would in all likelihood have already decreased our exposure to stocks based on those economic fundamentals, even before the event occurred.

AEI June 24

Our read on the U.S. economy has been pointing to a minor slowing over the past several months and we have made minor reductions in equity exposure accordingly. It’s important to understand that lower AEI readings are not necessarily an indication of recessions or bear market if the reading is still above the long term average tend. We make adjustments as we attempt to manage risk/reward outcomes not market time short term moves.

But as of this writing we still hold meaningful weighting to stock indices. Meanwhile, our fixed income holdings and low-risk, non-correlated assets appear to be accretive to the portfolios, helping to mitigate risk and offsetting drawdowns on the equity side.

We consider it unlikely for the Brexit news to trigger substantial reductions in equity exposure—unless economic fundamentals deteriorate below multiyear levels. If that were to occur, we could get very defensive and even take inverse positions.

That said, we’ll be closely watching the economic trends. For example, if the U.S. dollar’s strength carries forward into another significant broad rise, that would likely put renewed pressure on the U.S. manufacturing sector. But if we try to drill down on what changes in the E.U. mean to trade and export data, along with capital flow expectations, it is too soon to make a forecast about long-term implications.   After all it will take years to implement Britain’s exit from the EU and a lot can happen before that.

What we do know is uncertainty creates volatility, which we’re certainly seeing in the markets. But it’s hard to connect the dots from shock over the Brexit vote to a recession or bear market.

We are comfortable with the current portfolio and have high confidence in our robust “now-cast” tools such as the AEI. The gradual reduction in risk exposure over the past several months has helped the portfolio achieve desired results.  And, if the economy picks up as is expected later this year, we would re-examine increasing beta.

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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