Economic Data, Valuations & Portfolio Construction
Global economic data has also deteriorated in 2019. The U.S. economy isn’t immune to the global growth slowdown. The Atlanta Fed GDPNow Forecast Model is 1.50% as of June 28, 2019. On Aug. 1, 2018, this model was forecasting GDP to be 4.95%.
U.S. stock valuations are neither cheap nor expensive. According to FactSet, the S&P 500 Index forward P/E ratio is 16.6x as of June 28, 2019 and is slightly above the five-year average (16.5x) and the 10-year average (14.8x).
There is plenty for investors to worry about going into the second part of this year.
From a long-only ETF factor perspective, quality, size and momentum have outperformed the most thus far in 2019.
Source: ETFAction.com, data accessed on June 28, 2019
Int’l Equities: Valuations Attractive
On the back of an accommodative Fed, international developed and emerging market equities posted strong returns in the first half of 2019, but remain at attractive valuations. The Shanghai Stock Exchange Composite Index (China) increased by 20.96% (in CNY terms); the Euro STOXX 50 Index (Europe) rose by 19.81% (in euro terms); the MSCI Emerging Markets Index was up 11.06% (in USD terms); and the Nikkei 225 Index (Japan) increased by 7.53% (in Japanese yen terms).
In our view, emerging market equities (China in particular) remain attractive for long-term investors, as they are trading at a substantial valuation discount compared to the U.S. stock market. According to ETFAction.com, the iShares MSCI China ETF (MCHI) is projected to have 15.00% EPS growth based on 2019 analyst estimates, whereas the S&P 500 ETF Trust (SPY) is projected to have only 3.75%.
Fixed Income: Focus On High Grade
U.S. interest rates declined across various maturities in the first quarter. Given that the U.S. yield curve is relatively flat, ultra-short-duration bond funds are providing investors with a more attractive opportunity compared to longer-duration bond funds.
The Bloomberg Barclays U.S. Aggregate Bond Index is up 6.11% as of the end of the first half. We continue to prefer owning higher quality U.S. bonds across our portfolios. We maintain an overweight position in U.S. municipal bonds and U.S. mortgage-backed securities, both of which are highly rated. In fact, between 75-80% of our fixed income bonds across both Astoria’s strategic and dynamic ETF portfolios are rated either AAA or AA.
Commodities: Pick Wisely
Along with stocks and bonds, commodities posted positive returns in the first half. The Bloomberg Commodity Index increased by 3.83% although, once again, there were notable divergences across the complex. The United States Oil Fund LP (USO) increased by 24.64%, the SPDR Gold Trust (GLD) rose by 9.86%, the Invesco DB Base Metals Fund (DBB) climbed by 0.71%, and the Invesco DB Agriculture ETF (DBA) declined by 2.18%.
We have written that gold was attractive in a multi-asset portfolio, as it serves as a valuable diversifier during times of stress. As a reminder, our gold allocation helped soften our portfolio volatility in the fourth quarter of 2018, as gold rose 7.53% while the S&P 500 Index declined 13.52%.
Astoria Portfolio Advisors Disclosure: As of the time of this writing, Astoria held positions in DGRW, QUAL, JQUA, KBWB, XLV, USMF, GSLC, EDIV, DNL, WCHN, MCHI, RVNU, VTEB, VMBS, SPAB, AGG, BND JPST, MNA, BTAL, GDX, GLD and IAU.
Note that this is not an exhaustive list of holdings across Astoria’s dynamic ETF model portfolios.
Also note that Astoria maintains a set of strategic asset allocation ETF portfolios where the holdings vary from our dynamic portfolios. For full disclosure, please refer to our website.