As we navigate the current environment, financial advisors can consider portfolio strategies that are best suited for today’s market.
In the upcoming webcast, How ETF Experts are Countering Inflation, Matthew Bartolini, head of SPDR Americas Research at State Street Global Advisors, helped paint the picture of the current market environment. Equity and fixed income markets have responded negatively to the Federal Reserve’s hawkishness post-Jackson Hole conference, as investors adjusted rate expectations to be more aligned with the aggressive policy maker’s actions. On a more positive note, the U.S. Dollar climbed to its highest level in 20 years, outperforming the other major asset classes in August on the backs of the supportive Fed policy and global volatility.
Meanwhile, inflation remains stubbornly high, which triggered the aggressive Fed policy stance. Prices of core PCE components that are sensitive to the unemployment gap continue to march higher as labor costs surge. While market-based inflation expectations have dropped since April, consumer inflation expectations are still elevated, Bartolini added.
“A collection of TIPS, gold, real assets, equities, and commodities may offer inflation sensitivity, real asset sector diversification, and traditional diversification,” Bartolini said.
Looking ahead, Bartolini noted that following the Fed’s policy changes, rates expectations for next year were adjusted dramatically higher, with market implied rates for the December meeting moved above the FOMC’s median projections. Overall, the markets expect the Fed to reach the cycle terminal rate this year and cut interest rates next year
Meanwhile, Bartolini warned that leading economic indicators and near-term forward yield spreads are flashing a warning sign of economic recession.
In this type of environment, Bartolini commented that retail investors and risk-control strategies added equity exposures, but equity allocations remain below their historical median after investors across the board cut risk exposure. Looking at investment flows, ETFs, mutual funds, and money market funds have net outflows so far this year as a group, but passive ETFs continued to enjoy robust inflows despite the volatility.
Robert Michaud, chief investment officer at New Frontier Advisors, highlighted the New Frontier methodology in optimizing core portfolios for the current environment. New Frontier holds four patents for portfolio optimization and rebalancing technology, continuously calibrates to meet strategic long-term objectives, is not exposed to leverage or counterparty risk, and holds no proprietary ETFs or incentives from fund companies. Their portfolios try to achieve the most favorable combination of liquid, low expense ratio, index tracking error, and tax-efficient ETFs.
New Frontier portfolios include U.S. Core ETF Portfolios with varying degrees of equity and fixed-income exposure based on an investor’s long-term outlook and risk profile. Other portfolio strategies include the Global Core ETF Portfolios, Global Tax-Sensitive ETF Portfolios, and Multi-Asset Income ETF Portfolios.
Joseph Hosler, managing principal at Auour Investments, explained that the Auour portfolio investment methodology is based on risk-intelligent investing. The portfolios try to mitigate large losses by quantifying market risk appetite, discerning between consolidation and contraction, and moving to cash in times of market duress. Once conditions turn around, the portfolios will identify turning points and move to growth-oriented postures.
In the current market, Hosler argued that while inflation is more interesting to discuss, monetary tightening is easier to measure. For example, he noted that during historically hawkish Fed regimes, investors may find assets like U.S. REITs, energy equities, and U.S. small-caps among the best-performing assets. On the other hand, emerging markets have been among the most volatile assets, while TIPS and international equities have been among the worst performers.
Financial advisors who are interested in learning about inflation-related investment strategies can watch the webcast here on demand.