Rob Stein is all about the power of economic fundamentals. Building ETF portfolios that are widely used by advisors and investors alike, Stein and his team at Astor Investment Management are constantly taking the economy’s temperature and adjusting exposures accordingly. Today the firm manages nearly $2 billion in assets. Stein tells us what sectors he likes and doesn’t like for 2017, and why sector rotation is a good strategy to consider.
ETF.com: What’s your macro outlook going into 2017?
Rob Stein: We have something we call the Astor Economic Index, where we aggregate lots of economic fundamental data, and we create a reading with it. We then compare it to historical versions of that data to give us the temperature of the economy. We use that to adjust how much risk or how much stock we want in our portfolios.
It’s served us well over many years, and right now, it isn't saying a whole lot. It’s saying we're growing slightly above the recent trend—the recent trend being eight, nine years. A lot of people will tell me that 2% GDP growth is weak, and the economy is capable of doing better, but that’s the trend we’ve seen. The 3.5%, 4% GDP we aspire for hasn’t been seen in well over a decade.
Unemployment rates, GDP—these are numbers that aren't shooting the lights out, but they’re above levels we’ve seen in the last five, six, seven years. It’s certainly enough growth to support owning stocks, and having stocks be positively sloped.
We're in a low-return, low-rate environment. Risk assets aren't giving what they used to, but neither are low-risk or no-risk assets. In that context, is 1.5-2% growth good? It should support stocks. Is 5-7% equity returns good? Well, better than nothing, and better than what you're getting on risk-free assets.
I think that environment is going to stay around through much of the next year, or at least through the first couple of quarters of 2017. Now, don't get me wrong: Anything could happen tomorrow. But as the economic data looks now, there wouldn’t be anything that I think would create sustained wealth destruction or that the markets and economy wouldn't recover from. We would adjust our portfolios to handle volatility, but probably would not get defensive unless the economic data started to deteriorate.
ETF.com: So how would you implement that view, from a sector perspective?
Stein: We start by deciding how much risk assets we want to have; let's say 70%. Then we drill down into how we want to express that weighting and in what sectors. One of the things we do is look at where the growth is occurring in the economy. Of the GDP, of the output, what sectors are contributing to that the most? Same thing in employment trends: Where are the jobs being added every month going? We look to identify those sectors.
We then we look at various momentum and valuation models to come up with a portfolio weighting. Lately, the overall average of them all has outperformed any one individually. I don't think that's a consistent theme. I think there’ll be sectors that will stand out.
For example, energy. It did very poorly in 2015, and that was something that was picked up on in economic fundamentals. The energy sector was hiring fewer people than it had in the past. It was contributing less to overall economic growth than it had in the past, and it was a sector that lagged that year. Energy has bounced back some, and it’s one of the better-performing sectors now.
I would caution riding that wave much longer. It doesn't seem that the economic fundamentals of it being a leader are supportive, and we’ve actually reduced our weighting to the energy sector recently. But one of the sectors we like is the financial sector.