Weekly Economic Update

Economic Update 12-09-2019

 

  • Economic data for the week included a sharply better than expected employment report for November, as well as stronger consumer sentiment, yet weaker readings for both ISM manufacturing and services data, although the latter survey remained in expansion.
  • U.S. and foreign equity markets both gained, as trade optimism and economic results outweighed early pessimism. Likewise, interest rates rose, which punished government bonds but rewarded credit. Commodities gained as OPEC production cuts buoyed crude oil prices sharply last week.

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Weekly Economic Update

Economic Update 12-02-2019

  • In a shortened holiday week, economic data releases included an upward revision for Q3 GDP, stronger durable goods orders, lower jobless claims, and continued mixed but somewhat encouraging results in housing.
  • U.S. and foreign equity markets gained last week, with continued optimism about a potential trade deal coming to pass. Bonds were little changed, with U.S. fixed income outperforming foreign. Commodities lost ground overall due to lower prices for crude oil and natural gas.

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Weekly Economic Update

Economic Update 11-25-2019

  • During the week, several housing metrics continued to show improvement, although still a bit below expectations, coupled with positive consumer sentiment. On the other, the index of leading economic indicators declined again, reflecting a general tempering in economic growth.
  • U.S. and foreign equity markets declined last week, as optimism for a trade deal again waned. U.S. bonds gained, as the recipient of asset flows away from stocks, while foreign debt was held back by a stronger dollar. Commodities were down slightly, as declines in metals acted as more of an influence than the minimal change in the price of crude oil.

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Weekly Economic Update

Economic Update 11-18-2019

  • Economic data for the week included slightly higher-than-expected consumer and producer price inflation, positive retail sales and regional manufacturing data, while import prices declined.
  • U.S. equity markets ended the week as the best performers, with a positive showing, and outperformed mixed results in foreign equities. Bonds gained ground as interest rates fell back from recent peaks. Commodities were mixed with higher oil prices, but weaker showings from industrial metals and natural gas.

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Reminder: Trade Date Schedule for Upcoming Revisions

November 2019 Revision Announcement and Schedule

 

LSA has begun making revisions to all model portfolios over the next two weeks with the exception of Private Client Tax Eff, ETF, and TSP.  LSA will be posting a video explanation on what the IPC plans to do with the NTF ETF models now that the major custodial platforms have removed ticket charges on all ETFs and Stocks.  Please note the date that the revisions will be posted to the website.  These posts will be made at the end of each business day.

LSA will be making revisions to the following portfolios:

Week 1

Posted Tuesday, November 5th: Private Client, Private Client Traditional, PC L100k, BME, CBP – targeted trade date – Tuesday, November 12th.

Posted Wednesday, November 6th: American Funds, JNL Elite Access, Sammons, Voya Select Advantage, Vanguard, Vanguard TE – targeted trade date – Wednesday, November 13th.

Posted Thursday, November 7th: DFA, DFA Blended, PC Blended, SRI, – targeted trade date – Thursday, November 14th.

 

Week 2

Posted Tuesday, November 12th: Fidelity, PC Income, JNL, Nationwide, Voya Golden Select, Voya VUL, Ohio National – targeted trade date – Tuesday, November 19th.

Posted Wednesday, November 13th: Allianz, AXA, Hartford, Lincoln, Metlife, Paclife – targeted trade date – Wednesday, November 20th.

Posted Thursday, November 14th: SBL Advisor Design, SBL Secure Design, Protective Life, Prudential, Sunlife, Transamerica, Valic – targeted trade date – Thursday, November 21st.

 

*The Mutual Fund and ETF revisions will impact the NTF models as well.

*As a reminder, the Revision Explanation Presentation/Video is posted in the “Portfolio News,” section on each of the platform home pages and will be posted at the end of the business day on the targeted posted date.

Investment Rationale:

As communicated in our latest portfolio update presentation, the LSA Investment Policy Committee continues to believe that the probability of recession will continue to grow over the next 12 – 18 months.  With this as a high level thesis, the upcoming changes to models have been focused around two themes.  First, reducing risk…..this is the concept of taking down risk on the fringes of models to get a little more conservative, but not to restrict up-capture participation.  We believe that this reduction of risk will allow the models to continue to benefit from a “cautiously optimistic” stance on the markets.  Our intent is to start addressing market concerns with a focus on becoming more defensive.  The committee has also outlined a “part two” revision that is being defined as “hedging risk.”  This hedging risk movement is not expected to be implemented until 2020 and will be data dependent upon further deterioration of our recession indicators as outlined in our portfolio update presentation.  The hedging risk movement, down the road, has a more distinct focus on reducing correlations to the portfolios with the use of low or negative correlated investments to target alpha opportunities in a more prolonged correction, or recession.  Both phases of upcoming changes are addressing the simple stance on current market conditions that the IPC believes that there are greater downside risks at this point in the cycle, versus upside opportunity.  If you have not had a chance to review the monthly portfolio update video please do for greater details around potential headwinds that LSA is concerned with at this time (log in to lsabeta.com to view video).  The LSA IPC is identifying this round of revisions to focus on reducing some risk to the models in order to help address these growing concerns of potential recession as the current market cycle starts to wind down.  Although the committee continues to be cautiously optimistic over the next six to eight months, the focus of changes in this first round of revisions is to start the movement of getting more protection in the models.  The high level concepts that will be addressed can be found below.

 

There will be a focus on three general themes with this round of revisions:

 

  1. The LSA IPC will be reviewing every model, position by position, to make sure that we are achieving the spread profile that we target with each of the mutual fund, ETF, and subaccounts in the various models. What the committee is looking for is a manager’s ability to generate a positive spread between average up-captures and down-captures with an emphasis on down-captures.  This spread relationship is where we continue to believe real wealth accumulation comes from over time. During periods of market volatility, this spread can potentially help create a favorable return profile when markets begin to struggle. This review continues to support the LSA search process, but the IPC will focus on better down-capture characteristics at this time, to emphasize our focus on risk reduction.
  2. The IPC will be increasing some defensive posturing within the models. This translates to an average of about a 5% increase to fixed income.  This will begin to exercise the more conservative sides of the bands from a model perspective.  The increase in fixed income is focusing on higher quality asset classes as the committee continues to take down credit exposures to the models.  This movement includes the reduction, or removal, of bank loans in a number of the models and increasing more of our core bond position.  Please note that a more core bond position will increase our duration exposure. In doing so, this could create a greater correlation to the 10-year treasury.  That said, this increase in duration, could potentially provide a better risk-off buffer with our overall fixed income exposures.  As volatility concerns continue to grow, credit exposures become more correlated to the equity markets, and eliminate some of the risk posturing we often lean on out of our fixed income sleeve.
  3. The LSA IPC will also be looking to reduce some equity exposures to the models. This reduction will predominately be focused on international equities that have continued to struggle.  In addition, when appropriate, we will also reduce some domestic equity exposures where the committee identifies overextension in the models.  LSA continues to believe that valuations remain attractive with international equities but the developed world continues to struggle with little improvement of economic data.  On the domestic equity side we continue to stay focused on overweighting large cap versus small cap and maintain a neutral stance on value versus growth.

 

To recap….LSA continues to follow our high level thesis in which we believe that the US economy will be faced with a couple of difficult headwinds that have increased the probability of a recession taking place in the next 12-18 months. We experienced firsthand some of these headwinds in the fourth quarter of 2018.   These headwinds include, but are not limited to, concerns with an inverted yield curve, uneasy trade policy discussions with China, a softening in corporate earnings and a deficit that is rapidly growing.   Although our current recession indicators are not sounding the alarms just yet, we do have three of our seven indicators starting to raise flags.  The LSA IPC will be looking to slowly reduce risk from the portfolios with this round of model updates.  We believe such model changes could be particularly helpful during conditions of weakness for equities and/or other equity-correlated risk assets.

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Weekly Economic Update

Economic Update 11-11-2019

  • In a light week for economic data, ISM non-manufacturing sentiment strengthened beyond expectations, while labor data was mixed, but remained generally positive.
  • Global equity markets rose in value during the week, with slightly better-than-expected economic results and again high hopes for an early phase trade deal. Bonds experienced a rougher week with negative returns, as rates ticked higher along with stronger growth expectations. Commodities were mixed, but generally higher, led by stronger prices for crude oil and natural gas in the energy sector.

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LSA Model Revision Announcement and Schedule

November 2019 Revision Announcement and Schedule

 

LSA has begun making revisions to all model portfolios over the next two weeks with the exception of Private Client Tax Eff, ETF, and TSP.  LSA will be posting a video explanation on what the IPC plans to do with the NTF ETF models now that the major custodial platforms have removed ticket charges on all ETFs and Stocks.  Please note the date that the revisions will be posted to the website.  These posts will be made at the end of each business day.

LSA will be making revisions to the following portfolios:

Week 1

Posted Tuesday, November 5th: Private Client, Private Client Traditional, PC L100k, BME, CBP – targeted trade date – Tuesday, November 12th.

Posted Wednesday, November 6th: American Funds, JNL Elite Access, Sammons, Voya Select Advantage, Vanguard, Vanguard TE – targeted trade date – Wednesday, November 13th.

Posted Thursday, November 7th: DFA, DFA Blended, PC Blended, SRI, – targeted trade date – Thursday, November 14th.

 

Week 2

Posted Tuesday, November 12th: Fidelity, PC Income, JNL, Nationwide, Voya Golden Select, Voya VUL, Ohio National – targeted trade date – Tuesday, November 19th.

Posted Wednesday, November 13th: Allianz, AXA, Hartford, Lincoln, Metlife, Paclife – targeted trade date – Wednesday, November 20th.

Posted Thursday, November 14th: SBL Advisor Design, SBL Secure Design, Protective Life, Prudential, Sunlife, Transamerica, Valic – targeted trade date – Thursday, November 21st.

 

*The Mutual Fund and ETF revisions will impact the NTF models as well.

*As a reminder, the Revision Explanation Presentation/Video is posted in the “Portfolio News,” section on each of the platform home pages and will be posted at the end of the business day on the targeted posted date.

Investment Rationale:

As communicated in our latest portfolio update presentation, the LSA Investment Policy Committee continues to believe that the probability of recession will continue to grow over the next 12 – 18 months.  With this as a high level thesis, the upcoming changes to models have been focused around two themes.  First, reducing risk…..this is the concept of taking down risk on the fringes of models to get a little more conservative, but not to restrict up-capture participation.  We believe that this reduction of risk will allow the models to continue to benefit from a “cautiously optimistic” stance on the markets.  Our intent is to start addressing market concerns with a focus on becoming more defensive.  The committee has also outlined a “part two” revision that is being defined as “hedging risk.”  This hedging risk movement is not expected to be implemented until 2020 and will be data dependent upon further deterioration of our recession indicators as outlined in our portfolio update presentation.  The hedging risk movement, down the road, has a more distinct focus on reducing correlations to the portfolios with the use of low or negative correlated investments to target alpha opportunities in a more prolonged correction, or recession.  Both phases of upcoming changes are addressing the simple stance on current market conditions that the IPC believes that there are greater downside risks at this point in the cycle, versus upside opportunity.  If you have not had a chance to review the monthly portfolio update video please do for greater details around potential headwinds that LSA is concerned with at this time (log in to lsabeta.com to view video).  The LSA IPC is identifying this round of revisions to focus on reducing some risk to the models in order to help address these growing concerns of potential recession as the current market cycle starts to wind down.  Although the committee continues to be cautiously optimistic over the next six to eight months, the focus of changes in this first round of revisions is to start the movement of getting more protection in the models.  The high level concepts that will be addressed can be found below.

 

There will be a focus on three general themes with this round of revisions:

 

  1. The LSA IPC will be reviewing every model, position by position, to make sure that we are achieving the spread profile that we target with each of the mutual fund, ETF, and subaccounts in the various models. What the committee is looking for is a manager’s ability to generate a positive spread between average up-captures and down-captures with an emphasis on down-captures.  This spread relationship is where we continue to believe real wealth accumulation comes from over time. During periods of market volatility, this spread can potentially help create a favorable return profile when markets begin to struggle. This review continues to support the LSA search process, but the IPC will focus on better down-capture characteristics at this time, to emphasize our focus on risk reduction.
  2. The IPC will be increasing some defensive posturing within the models. This translates to an average of about a 5% increase to fixed income.  This will begin to exercise the more conservative sides of the bands from a model perspective.  The increase in fixed income is focusing on higher quality asset classes as the committee continues to take down credit exposures to the models.  This movement includes the reduction, or removal, of bank loans in a number of the models and increasing more of our core bond position.  Please note that a more core bond position will increase our duration exposure. In doing so, this could create a greater correlation to the 10-year treasury.  That said, this increase in duration, could potentially provide a better risk-off buffer with our overall fixed income exposures.  As volatility concerns continue to grow, credit exposures become more correlated to the equity markets, and eliminate some of the risk posturing we often lean on out of our fixed income sleeve.
  3. The LSA IPC will also be looking to reduce some equity exposures to the models. This reduction will predominately be focused on international equities that have continued to struggle.  In addition, when appropriate, we will also reduce some domestic equity exposures where the committee identifies overextension in the models.  LSA continues to believe that valuations remain attractive with international equities but the developed world continues to struggle with little improvement of economic data.  On the domestic equity side we continue to stay focused on overweighting large cap versus small cap and maintain a neutral stance on value versus growth.

 

To recap….LSA continues to follow our high level thesis in which we believe that the US economy will be faced with a couple of difficult headwinds that have increased the probability of a recession taking place in the next 12-18 months. We experienced firsthand some of these headwinds in the fourth quarter of 2018.   These headwinds include, but are not limited to, concerns with an inverted yield curve, uneasy trade policy discussions with China, a softening in corporate earnings and a deficit that is rapidly growing.   Although our current recession indicators are not sounding the alarms just yet, we do have three of our seven indicators starting to raise flags.  The LSA IPC will be looking to slowly reduce risk from the portfolios with this round of model updates.  We believe such model changes could be particularly helpful during conditions of weakness for equities and/or other equity-correlated risk assets.

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Weekly Economic Update

Economic Update 11-04-2019

  • Economic data during the week included the Federal Reserve lowering key interest rates by a quarter-percent for the third straight time. Insofar as data was concerned, several manufacturing metrics continued to show contraction, while housing/construction and the employment situation report for October came in stronger than expected.
  • Global equity markets rose in line with the U.S. Fed lowering rates, and extension of Brexit, and lack of any negative U.S.-China trade sentiment. Bonds rallied as rates across the curve ticked downward to reflect the newly-lowered short-term rate along with tempered inflation readings. Commodities were flattish overall, despite a drop in crude oil prices over the week.

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Fed Note

The Federal Reserve Open Market Committee decided to cut interest rates a third time, by another 0.25%, to a new range of 1.50-1.75%. As with the two prior cuts in recent months, this move was controversial. The economic community was mixed as to the underlying need for this continued easing, highlighted by the two dissents this time, by governors preferring to keep rates where they were.

The formal statement was little changed from September from a policy standpoint, but was simplified, which tends to follow Chairman Powell’s plain-language style. It noted that the labor market remains strong and economic activity continues to rise at a ‘moderate’ rate. Also noted again were strength in household spending, while business fixed investments and exports remain weaker than the FOMC would like. The term ‘act as appropriate’ has now been removed, which has signaled that this rate cut could be the last for a while (barring further economic deterioration).

The dashboard of relevant Fed variables continues to show mixed results, in keeping with the varied sentiment about the rate cuts:

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Weekly Economic Update

Economic Update 10-28-2019

  • Economic data for the week included weaker readings for durable goods and consumer sentiment. Housing data points were down for the month but mixed on a longer-term standpoint, while jobless claims fell, which was a positive.
  • Global equity markets generally gained on the week, with U.S. and foreign stocks performing largely in line. Fixed income returns were flat, as interest rates were again little changed from the prior week. Commodities gained due to sharp price increases for crude oil contracts.

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LSA Presents: Kevin Lane!

www.LSAstockIQ.com

LSA Presents: Kevin LaneLIVE Webinar Today at 3:30 Central

Kevin, a staunch proponent of “Fusion Analysis”, which combines multiple research disciplines into an unbiased data-driven approach to investing, founded FusionIQ in 2008. He currently serves as the CCO for IQvestment, a digital investment advisory firm.

Kevin Lane was featured as a member of Business Week’s 2002 “Analysts Who get It” A-Team for his notable stock-picking acumen.  A sought-after analyst, Kevin has been routinely cited over the course of his career in major media outlets such as; Bloomberg Television, Fox Business Television, CNBC, Barron’s, The USA Today, and Business Week. Additionally, he has been hired as a research consultant to many of the nation’s top hedge funds and trading desks.

Fusion 1

 

 

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Weekly Economic Update

Economic Update 10-21-2019

  • Economic news last week included mixed reports on the regional manufacturing and housing front. Additionally, retail sales and industrial production disappointed relative to expectations. The index of leading economic indicators declined slightly, in keeping with data that continues to show a mixed picture.
  • Equity markets experienced gains globally, based on decent headline earnings reports and some optimism about formalized trade progress. Fixed income was little changed in the U.S. on the week, while foreign bonds outperformed due to a weaker dollar. Commodities were also little changed on the week, with a divergence in the energy space between natural gas and crude oil prices.

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