Did your passive index fund call you this month? NO, it did not!
Imagine a scenario of sitting on a plane. After some turbulence, the pilot came back and asks you if everything seemed ok. He tells you he has the plane on auto pilot and was not fully watching. Imagine the shock/concern/fear! The assumed professional asks you, the passenger, what you thought. While the scenario is anecdotal, that’s how purely passive investors should feel after the recent stock market gyrations.
Like auto pilot, there is a “flight plan”, but nobody at the controls if things get turbulent, and nobody to talk to. In our opinion, many of the new strategies in the market today are not experienced, robust or time tested. A bunch of computer programmers threw some numbers into a computer and viola. No market experience, just a bunch of data and passive portfolio.
At Astor, we’ve utilized our market experience paired with academic research capabilities to navigate turbulent markets for almost twenty years. As I review the market action over the past month and review the economic data that makes up our propriety index, I see that not much has changed. Growth may have moderated but is still very solid.
Source: Astor Calculations
From the way we at Astor view portfolios, the only thing that has “materially” changed is the stock market itself. Why does this matter? A healthy economy can generally support equity prices better than a decelerating and contracting economy. This approach also helps us to put context to confusing periods that test the mettle of most investors. Even more important to the present, our research has shown that that substantial return/risk opportunities can arise when the market declines while the economic data is stable to improving.
We used the Astor Economic Index® to break the economy up in two camps; healthy economic periods (AEI > 0, above average growth line) versus unhealthy periods (AEI < 0, below average growth line).
From September 1991 through August 2018, there have been 325 monthly periods of observable data. The average monthly return for the S&P 500 during that span is 0.85%. When the AEI is above 0 and the market ends the month down over 2%, the average return the following month is almost 3x the average for all months.
This month we got the first read on GDP and it came in at a strong 3.5% percent, handsomely beating expectations and by any measure a good number. ISM manufacturing and non-manufacturing have been consistent with a solid growth environment. And the fly in the ointment, the global PMI’s which continues to fall from the highest levels since 2008 is nothing new.
Markets have misbehaved in October, as risk has climbed across the board. Some of the best performing market segments have led this market down this month.
As I posted in my last blog the market climbs a wall of worry and slides back on a wall of uncertainty. Known risk can be evaluated and investments can be made that factor in that risk. Unknowns are, well, unknown and difficult to assess risk levels, so many investors hide. Risk premiums have changed, and growth has moderated recently but the expected return for stocks remains positive. I cannot tell you if the worse is behind us, but I can tell you that the way we view portfolios is still suggesting higher values before this expansion ends. I’ve heard analogies that the US is the cleanest dirty shirt in the hamper right now. That would assume the economy is in “the hamper”, and that’s far from the truth.
So, reconsider a heavily weighted portfolio to passive and make some allocation to an active strategy whose team has a plan and its hands on the wheel. Astor has been managing ETF portfolios for almost two decades, with a time tested, robust and repeatable process. But if not Astor, find a seasoned time tested professional and call her soonest.
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.