The U.S. stock market’s downturn this week has been one for the record books, with the Dow Jones industrial average staging its deepest one-day point drop ever in a sell-off that is now on its second day.
Investors everywhere are scratching their heads trying to figure out what to do. Five ETF strategists making portfolio decisions everyday offer here some of their thoughts on what this market action means, and what investors ought to do about it.
John Davi, Founder & CIO, Astoria Portfolio Advisors, New York:
Our big call for 2018 was that investors needed to hedge their risk assets. After an 8% pullback and VIX touching 50, I guess we made the right call. Fundamentally, U.S. earnings are still coming in strong, the global economic recovery remains in sync, and recession risks remain low. We envision a bit more selling pressure before fundamental buyers step in to support the market.
We’re constructive on assets where there is a margin of safety such as international value, emerging market equities and FX, and deep U.S. cyclicals. But we’re hedging all our risk assets with ETFs that carry well to produce higher risk-adjusted returns. We went into 2018 with excess cash, and we’re using it to buy some of our favorite longs while increasing our hedges.
Some of our top ETF ideas include the iShares Core MSCI Emerging Markets ETF (IEMG), iShares Core MSCI Total International Stock ETF (IXUS), PowerShares KBW Bank Portfolio (KBWB), Alpha Architect International Quantitative Value ETF (IVAL), Alpha Architect International Quantitative Momentum ETF (IMOM) and GraniteShares Bloomberg Commodity Broad Strategy No K-1 ETF (COMB).
On the hedging side, we’re using the IQ Hedge Multi-Strategy Tracker ETF (QAI), iShares Gold Trust (IAU), VanEck Vectors Short High-Yield Municipal Index ETF (SHYD), PowerShares Variable Rate Preferred Portfolio (VRP), SPDR Blackstone / GSO Senior Loan ETF (SRLN) and cash.”
Ben Doty, Senior Investment Director, Koss Olinger; Gainesville, Florida
What we saw on Monday was that few, if any, places were safe. The best thing to do is nothing. Time in the markets, as the adage in this industry goes, is what’s important, not timing the market. But we are or will be doing some buying.
On the bond side, it’s a good time to buy on fear. We’re short the duration of the Bloomberg Barclays U.S. Aggregate, so as the long end of the Treasury curve rises, we see that as an opportunity to add duration. The Schwab US Aggregate Bond ETF (SCHZ), the iShares Core US Aggregate Bond ETF (AGG) and the WisdomTree Barclays Yield Enhanced US Bond Aggregate ETF (AGGY) are a way to do this.
On the equity side, risk assets that were cheap two weeks ago are better deals today, especially since the sell-off was broad. Value stocks are better values. Overseas markets are as well. We like the Schwab Emerging Markets ETF (SCHE).
Clayton Fresk, Portfolio Manager, Stadion Money Management; Watkinsville, Georgia
Does Monday’s move mean the bull market is over? While always a possibility, we may be a long way from being able to make that claim.
However, it’s safer to claim the complacency trade may have just come to an end. The market had been in record territory in terms of lack of volatility. Yesterday’s action could have just been the jolt needed to move the market from complacency mode into more of a normal market-action mode.
While the situation will definitely have market participants keeping a closer eye on the market going forward, making wholesale adjustments based on this one-day jolt may be short-sighted.
Stephen Blumenthal, Chairman & CEO, CMG Capital Management Group; King of Prussia, Pennsylvania
The market had been and continues to be overbought, overvalued and over-believed. Yet that doesn’t mean it can’t trend higher.
We suspect it’ll trend higher over time as our trend models continue to signal a favorable environment for equity ETFs. We see the strongest momentum in emerging market ETFs such as the iShares MSCI Emerging Markets ETF (EEM).
My biggest concern is just how much money is on the same side of the volatility trade—risk-parity guys, short-volatility guys and the like. It’ll be interesting to see if a squeeze is put in place. Overall, ETFs are doing well in regard to trading and liquidity.
Charts courtesy of StockCharts.com
Ben Lavine, CIO, 3D Asset Management; Hartford, Connecticut
We’ve written in the past how compressed narrow risk premiums—high valuations in equities, narrow credit spreads in fixed income—have produced a tightly coiled market suspect to market-moving headlines. However, even the latest volatility has taken us aback.
But we believe it’s being driven by quant-based strategies, such as risk-parity funds and commodity trading advisors’ funds, that are highly sensitive to changes in the risk environment.
Although risk premiums are still narrow versus historical standards, we believe the macro backdrop is still largely supportive of risk-taking, but fundamentals will drive total return rather than further compression of risk premiums. Equity investors will earn their earnings growth rather than rely on further multiple expansion.
Contact Cinthia Murphy at [email protected]