Dynamic ETF Model Portfolios Can Adapt to Changing Market Conditions

Financial advisors who are seeking ways to smooth out a potentially bumpy ride in the years ahead may consider customized strategic and tactical asset allocation strategies through exchange traded fund model portfolios.

In the recent webcast, The Absurdity of This Rebound: Strategic and Tactical Strategies, Frank Donovan, Vice President, Business Development, Model Capital Management, underscored the quick recovery in the equity markets, with the S&P 500 index rebounding over 35% since its March lows. The Coronavirus pandemic has shocked the markets and dragged year-over-year Q1 S&P 500 operating earnings down 13.8%, the most since 2009. However, after the rebound in prices, TTM operating price-to-earnings ratio for the S&P 500 was at 21.8, its highest level since February 2018.

Looking at the economy, Donovan also painted a dismal picture, with consumer confidence falling sharply in April, and consumer spending, which makes up 70% of the economy, down by the most in 74 years. Meanwhile, industrial production plunged by the most on record since data was kept from 1919. Manufacturing PMI inched up to 43 in May but remains in a sharp contraction or slightly above the 2009 lows.

In this type of market,  Gary Stringer, President and Chief Investment Officer, Stringer Asset Management, pointed out that their models reveal a slightly optimistic outlook for the U.S. and Japan, with a more cautious take on Europe and cautiously optimistic position on the emerging markets.

Stringer noted that near-term leading indicators are positive. For example, current monetary conditions are favorable due to aggressive Federal Reserve policies. Liquidity growth as measured by M1 growth spiked recently due to the Fed’s dramatic policy interventions, which was a positive signal. Both high-yield and investment-grade credit spreads look better, with investors demanding a higher return on capital. Industrial metal prices are also on the rise, suggesting a potential bottom with growth in demand after a significant price decline. Additionally, jobless claims are now stabilizing, which may indicate that the unemployed are going back to work.

Stringer Asset Management also focuses on the Cash Indicator, a combination of the VIX Index and TED Spread. The Cash Indicator offers a well-defined methodology to get out of the way during outlier events and back in when the markets begin to normalize. Importantly, the CI takes the emotion out of the decision making process. Currently, the Cash Indicator has fallen back to close to long-term median levels but continues to remain somewhat elevated, which reflects ongoing stress, and the model may reduce risk exposure and increase cash should conditions deteriorate.

Donovan also highlighted their MCM 6-month Equity Model. After the market rebound, the S&P 500 Price-to-Book Ratio, at 3.3, is now back to its February-2020 level before the downturn. The effect of this factor at -2.5% suggests the market is slightly overvalued.

Model Capital Management also noted that Consumer Sentiment remains the largest negative factor in the model, with a -20.8% contribution, after the largest monthly drop in sentiment on record in April. The overall effect of economic factors dropped by 4.9% this month, due primarily to deterioration in New Home Sales.

Consequently, given the current negative overall 6-month model forecast, Model Capital Management has taken a negative view on the S&P 500 with a 100% bonds or short-term defensive posture.

Financial advisors who are interested in learning more about strategic and tactical strategies can watch the webcast here on demand.