While the markets notoriously loathe the uncertainty surrounding political risk events, the midterms could still provide an opportunity for exchange traded fund investors ahead.
In the recent webcast, The Possible Policy Outcomes of the Midterms and How to Prep Your Portfolio, Matthew Bartolini, Head of SPDR Americas Research, State Street Global Advisors, argued that investor positioning is still defensive as equity allocations have not meaningfully increased, with the flow differential between equity and fixed income remains rangebound by its long-term median. Nevertheless, while retail investor sentiment has been the most bearish over the past three years, institutional investors’ sentiment has improved.
Overall, Bartolini noted that leading economic indicators have turned negative for the first time since the pandemic, pointing to a recession, and sentiment is weak as earnings growth has been downgraded across all regions, led by a decline in emerging markets. He added that while the industrials and consumer discretionary sectors are expected to post solid earnings growth in Q3, their earnings estimates have been downgraded amid elevated inflation and a sharp economic slowdown. Meanwhile, sectors with high dividend yields lead to earnings sentiment.
Looking at the individual S&P 500 sector leaders, Bartolini pointed out that after the recent weak performance, Real Estate valuations have become more attractive. In addition, Utilities and Energy continue leading price momentum and earnings sentiment. On the other hand, cyclical sectors have broadly seen weak earnings sentiment.
Despite the political risk surrounding the midterms this week, Bartolini said that this event has historically marked a turning point for the markets for the better. The S&P 500 has historically posted strong returns following a Midterm election on average, significantly outperforming pre-midterm periods. The S&P 500 Index has not posted a single negative return 12 months following a Midterm election since 1950.
Nevertheless, as investors consider ways to diversify in the current market environment, Adam Grossman, Chief Investment Officer, Global Equity, RiverFront Investment Group, highlighted stable investment strategies based on strong free cash flow, balance sheet, and access to strategic capital. RiverFront is an asset management holding company with a diversified line-up of active separate account/UMA solutions, direct indexing, and fintech to empower financial advisory teams.
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In addition, they sub-advised 7 ETFs, and their model portfolios combine RiverShares sub-advised ETFs and 3rd party ETFs to create diversified portfolios.
Among RiverFront’s sub-advised ETFs, the RiverFront Dynamic US Flex-Cap ETF (NYSEArca: RFFC) seeks to provide capital appreciation by investing at least 65% of its net assets in a portfolio of equity securities of publicly traded US companies. Equity securities include common stocks and common or preferred shares of Real Estate Investment Trusts (REITs).
The RiverFront Dynamic US Dividend Advantage ETF (NYSEArca: RFDA) seeks to provide capital appreciation and dividend income by investing at least 65% of its net assets in a portfolio of equity securities of publicly traded US companies with the potential for dividend income. Equity securities include common stocks and common or preferred shares of Real Estate Investment Trusts (REITs).
Gary Fullam, Chief Investment Officer of GLOBALT Investments, also highlighted GLOBALT’s goal to deliver superior risk-adjusted investment returns through a disciplined process executed by an experienced team.
GLOBALT is a leader in building portfolios that focus on the changes in the global marketplace. GLOBALT Investments offers a range of model portfolio strategies, including asset allocation strategies that range from defensive, conservative, income growth balanced, growth, and high growth targets; equity strategies that range from large cap core growth, large cap core, and equity targets; and lastly, environmental, social and governance strategies.
Financial advisors interested in learning more about investment positioning ideas based on the midterms can watch the webcast here on demand.