LSA Revisions – November 2018

LSA will begin making revisions to the following model portfolios over the next few days, (Private Client, PC Traditional, PC Blended, ETF, and SRI. 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:

*** Posted, November 14^th: SRI, Private Client Blended – TRADE DATE – Monday November 19^th.

*** Posted, November 15^th: Private Client, Private Client Traditional, ETF – targeted trade date – Tuesday, November 20^th.

*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 “News & Announcements,” section on the LSA Beta home page and will be posted at the end of the business day on the targeted posted date.

Investment Rationale:

As volatility picks up, LSA will be recommending changes to all the PC portfolios over the next week to address one primary investment theme and to continue with our movement of reducing risk or correlations in the portfolios. As market volatility picked up in October, we believe that this will be a continued trend moving forward especially around the Federal Reserve’s attempt to unwind QE, the fears of a trade war, strong dollar, and a gridlocked congress. The IPC will be recommending funds in the models with the attempt to reduce risk and to provide solid downside protection or to improve diversification in the models targeting more attractive valuation opportunities. The IPC continues to believe that the probability of a recession in the next couple of years has increased greatly over the last few months. The November 2018 model changes are not targeting big shifts in asset class exposures, as we believe the portfolios handled well in October, but we will continue to explore additional ways of reducing risk to the portfolios.

There will be a focus on one general theme with this round of revisions:

1.     With the mutual fund and ETF models, we will continue to work towards reducing risk in the model portfolios, but we will be focusing our efforts to clear out some under performing fund positions. Over a short period of time we have had a couple of managers under perform their appropriate benchmark. The LSA IPC would like to take this round of revisions to introduce replacements to these positions. The IPC continues to like the allocation break down of the models and with these changes will continue our efforts to pair these asset class exposures with top managers or investments to cover the asset class.

LSA continues to follow our high level thesis in which we believe that in late 2018 or 2019 the US economy will be faced with a couple of difficult headwinds that have greatly increased the probability of a recession taking place. We experienced firsthand some of these headwinds in the month of October.  These headwinds are not limited to, but include, the idea that the Fed rate hikes that started in December of 2015 will be thirty plus months in play at that time uneasy trade policy discussions with China, a softening in corporate earnings and a deficit that is rapidly growing. Historically, recessions will occur thirty to forty months after the Fed begins to raise rates. The markets will also be facing the unwinding of bonds purchased by the Fed in the numerous QE programs. 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 over the course of the next year. We believe such model changes could be particularly helpful during conditions of weakness for equities and/or other equity-correlated risk assets.