ETF model portfolios can adapt to overvalued markets


Financial advisers looking for ways to improve their practices can use fundamentals-based model portfolios to reduce the risk of wealth-destroying downturns.

In the recent webcast, Beware of the bubble: invest in an overvalued market, Matthew Bartolini, SPDR Americas Research Manager, State Street Global Advisors, provided an overview of current market conditions, with many segments making solid gains in the ongoing rally.

For starters, non-U.S. Developed instruments outperformed U.S. equities for the first time in five months in May, while fixed income posted another monthly gain as 10-year yields fell further. Meanwhile, the US dollar headed south in May, close to its lowest level of the year.

The gains reflect investor risk appetite improving from its biggest margin of the year in May, supported by reopening optimism and positive vaccine progress in advanced economies. The current market may also reflect increased complacency. While the implied volatility of equities edged up over the past month, the implied volatility of high yields remains calm.

Things are returning to normal as vaccination efforts lead to a shift in consumption patterns. As vaccination efforts intensify, mobility is approaching its post-pandemic highs, with visits to parks, retail and recreation improving the most. In addition, strong stimulus measures have increased personal savings, which may provide dry powder to finance pent-up demand and support the recovery in consumption of services.

Regarding global valuations, Bartolini stressed that equities developed outside the United States seem more attractive than emerging markets at large. However, Brazil posted attractive valuations in absolute and relative terms.

Focusing on US markets, Bartolini noted that value and dividend yield factors outperformed thanks to rising inflation, while momentum was the only underperforming factor in May. In addition, the energy and financial sectors ranked in the top three in terms of valuation, earnings sentiment and price dynamics.

Looking ahead, Bartolini argued that after strong Q1 earnings results, cyclical sectors should continue to lead Q2 earnings growth with positive earnings sentiment. Additionally, as the pandemic recedes in Europe, positive earnings sentiment and attractive valuations bode well for European equities.

In anticipation of mounting inflationary pressures and the Federal Reserve’s move to curb an overheating economy, most economists expect the Fed to cut its bond purchases in the final quarter of 2021, well ahead of the first rate hike. The retreat in accommodative measures is unlikely to affect US equities too negatively. For example, despite the Fed’s tapping talks in 2013, risky assets, with the exception of emerging market assets, posted solid gains thanks to continued improving economic conditions.

However, Bartolini warned that with rates still well below historical levels, income generation remains a challenge for bond investors.

In this market environment, Frank Donovan, Vice President, Business Development, Model Capital Management, warned of a potential pullback after the strong recovery in risk, noting that Shiller’s cyclically adjusted P / E, at 37, was only higher in the period 1999-2000.

Donovan warned that while stocks are the best for building wealth, bear markets destroy it. Serial bear markets persisted through the 1970s and 2000s, with more serious examples such as the United States from 1929 to 1954 and Japan from 1990 to the present day.

Donovan also pointed out the potential negative effects of rising inflation. He argued that inflation will likely rise until the Fed deals with it. The rise in inflation has not been observed since the 1970s.

“We believe this environment will be favorable for raw materials,” Donovan said.

To help financial advisors better adapt to potential changing market conditions, Donovan highlighted Model Capital Management’s forward-looking approach to tactical asset management.

Specifically, Model Capital Management offers a tactical growth and loss limit strategy that can provide exposure to the US market and participation in rising markets while placing a strong emphasis on risk management in the event of a downturn in the markets. . The Tactical Income Strategy generates income through exposure to US bond markets and total return through participation in multiple bond markets.

Financial advisors interested in learning more about investing in today’s market environment can register for the Wednesday June 16 webcast here.


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