Each month, Archetype’s Investment Committee parses through the news and the noise to determine the major themes driving financial markets, compiling the findings in our Monthly Market Commentary. The goal of this commentary is to provide a simple but concise and informative review of the previous month’s investment activity; namely, how did the major asset classes around the world perform, and why?
With our commentary, we do not intend to report on every single global economic release or data point, but mainly we try to focus on the few that consistently provide reliable indications of the overall health of the stock market and global economy. We feel our audience needs to be in the know of what’s going on, but at the same time doesn’t need to know the details behind the price of tea in China.
We rely on filtering a handful of data points through one of our Three Dials, or the three primary indicators that we believe drive markets. The Committee then provides a reading – Positive, Neutral, or Negative – on each dial, which are summarized below:
An attempt to define the general directional trend of financial markets. Many scholars and investors utilize the 200-Day Simple Moving Average (SMA) as a tool in confirming a change in market polarity – a cross above the 200-day SMA is considered a bullish move, while a breakdown below its SMA is a bearish indicator.
Financial markets operate as a direct function of real underlying economic activity, and our Fundamental Dial attempts to forecast future economic growth through leading indicators such as housing permits, initial unemployment claims, and manufacturing delivery times. When markets and economies are growing, riskier assets such as equities are poised to outperform, while weakening economic data suggests a tactical reduction in risk. The fundamentals provide insight into the underlying health of the financial system.
Another way to think of the old “buy low, sell high” adage is to buy what is cheap and sell what is expensive, and our Valuation Dial seeks to determine the relative attractiveness of differently priced assets. History indicates that buying overpriced assets leads to below-average returns and utilizing measures such as the Cyclically Adjusted Price-to-Earnings ratio helps us determine whether equities appear attractively priced relative to historical norms, or whether lofty valuations indicate caution in our risk exposure.
Once we have a reading on each of our Three Dials, the Committee can then make two important conclusions:
If all three dials are providing bullish readings, then the Investment Committee would take an aggressive, pro-growth posture in each of our core investment portfolios. If all three dials were leaning bearish, the Committee would take our portfolios to a more conservative and defensive position. Most of the time, however, the dials will provide a mixed reading - for example, with two dials exhibiting a bullish posture and one coming in bearish.
Whenever we get a change in the Three Dials composite reading, the Investment Committee takes that into consideration in whether to adjust our tactical portfolio positioning. Outside of regular portfolio rebalancing, a new reading in our Three Dials composite is the primary driver of shifts in Archetype’s portfolio allocations.