ETF investors can look at various factor strategies to target specific market exposures and investment outcomes as a way to prepare for possible changes in market conditions ahead.

On the recent webcast (available On Demand for CE Credit), 4th Quarter Factor Views: Understanding Today’s Market, Samantha Azzarello, Vice President, Global Market Strategist for J.P. Morgan Asset Management, outlined the current market environment and pointed out that the equity market can expect further growth ahead. Sustaining the current bullish conditions, corporate profits remain strong, with robust earnings per share and profit margins.

Despite the equity markets trading near record highs, valuations remain relatively in line with historical averages. The current forward price-to-earnings ratio of 16.8x for the S&P 500 is now trading around the 25-year average of 16.1x.

The Federal Reserve’s normalizing monetary policy and rising interest rate outlook could put pressure on the bull market outlook, but the tighter monetary policy typically corresponds with an expanding economy as well. Azzarello added that when yields on benchmark 10-year Treasuries are below 5%, rising interest rates have historically been associated with rising stock prices. There has traditionally been a positive relationship between yield movements and stock returns during these initial periods of interest rate movements.

Market pullbacks aren’t necessarily foreshadowing another economic recession

Azzarello mentioned that while the S&P 500 experienced average intra-year drops of 13.8% for the past 38 years, the benchmark has enjoyed positive annual returns in 29 of those years as well.

If investors still want to participate in any further market upside but are also wary of potential risks ahead, they may look to smart beta or factor-based investment strategies to limit downside risks. Joe Staines, Research Analyst and Portfolio Manager at J.P. Morgan Asset Management, explained that factors are drivers of risk and return for any security. Compensated factors are backed by economic rationale and expected to provide persistent positive returns over the long-term.

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