In recent weeks, the S&P 500 has been on a rollercoaster ride, plunging dramatically in early October only to make partial recoveries heading into November. The general upward trend that had been in play since early in 2018 seems to have been reversed, or at least thrown somewhat off kilter, in the past few weeks. Understandably, investors may be skittish about the prospect of equities at this point in time, with some calling for the largest recession in years.
On the other hand, there are also analysts who believe that the economy of 2018 is not nearly as bad off as the economy of 2008 was. A recent report by Astoria Portfolio Advisors' John Davi on ETF.com offers a few reasons why investors may still consider equities, and particularly equity exchange-traded funds (ETFs), at this time.
Strength of Fundamentals
The report suggests that the forward P/E ratio of the S&P 500 is 15.7, adding that this is "simply not expensive." With higher interest rates comes stronger competition for stocks, but Davi argues that "U.S. stocks are significantly more attractive than bonds" at those levels.
With the end of corporate earnings season and the coinciding end of the blackout period, investors can expect buybacks to resume shortly. Buybacks could lead to short-term increases in stock prices as the earnings per share levels go up, too. The analysis suggests that the most recent earnings season for the U.S. will mark about 25% growth in profits, providing one of the strongest quarters overall in more than a decade.
Impact of the Midterms
After the midterm elections in early November, the U.S. can look forward to a split Congress for at least the next two years. While this does not necessarily signify anything in particular for the stock market, there are reasons to believe that it may contribute positively to equity performance. Specifically, a divided Congress may lead to a change of tone regarding trade policy with China and other countries around the world.
What This Means
In the report, Astoria Portfolio Advisors recommends a reduction of fixed-income and emerging market equities holdings, as well as a continued underweight approach to bonds. Davi points to the Vanguard Mortgage-Backed Securities ETF (VMBS) as one that his firm has exited, owing to its 100% exposure to AAA bonds at a duration of about seven years. Instead, he says, "we are keeping duration as short as possible given an environment of rising inflation and higher interest rates."
Astoria has shifted its approach toward dividend growth products such as the WisdomTree US Quality Dividend Growth Fund (DGRW) to provide exposure to companies with solid return on equity (ROE) and return on assets (ROA). DGRW had an ROE of 19.5% as of the end of September, compared with 15.6% for the S&P 500 at the same time.
At the same time, Astoria is moving away from emerging market equities. Davi indicates that his firm "still believe[s] EM stocks serve a place in a globally diversified multi-asset portfolio," but he suggests that, with the MSCI Emerging Markets Index at a 40% discount relative to the S&P 500, "EM stocks are a value play, and historically value and momentum stocks have exhibited negative correlation."
All told, Astoria finds U.S. equities to be a promising play, at least on a short-term basis for the upcoming months. Following last month's correction and the shifts indicated above, it's possible that this field of names could be heading upward over the near term. ETFs focused on this group of stocks may be poised to win back gains they may have lost during the previous correction.