With inflation potentially nearing a peak, the Fed continuing to raise interest rates, recession risks rising, and a stock market acting like the good times are back, investors have a lot to process today. John Davi, the CEO and CIO of Astoria Portfolio Advisors, which oversees $1.3 billion in assets, uses a macro-based quantitative approach to navigating the market. He joins the ETF Think Tank to offer his thoughts on the current environment.
Davi says that he’s currently taking the view of where we are in the economic, earnings, and inflation cycles. His firm thought the Fed would step in and stimulus would be injected into the system, so they were looking to hedge against a big earnings and inflation cycle early on. While maintaining a long-term strategic perspective, he tilted towards value and added inflation hedges. That theme has largely played out, but now he feels investors should start nibbling again with stocks and credit. October could be a turning point.
On the fixed income side, Davi says his company is generally underweight bonds and focused on quality. He feels the bond market priced in the rate hike cycle earlier this year, but now could be an interesting time to dip your toes back in. He notes that he’s staying away from MBS based on the Fed pulling back, but munis are starting to look.
Davi says that in the portfolio construction process, he prefers stocks over bonds because they tend to perform better over time but uses fixed income for volatility management. He likes dividend stocks and thinks they’re a “no brainer” if you can get them at a P/E of 14. He also says that international stocks at 10-13 multiple and emerging markets at 8-10 are opportunities you don’t see come around very often.
Davi uses liquid alternatives as part of his portfolio strategy, but likes them as portfolio insurance. He generally targets 15-20% exposure, but focuses on products with low to negative correlation to stocks and aren’t terribly expensive. Some people say REITs or high yield bonds are insurance, but those have significant downside. Astoria uses some long/short strategies and inflation strategies. They’ve used merger arbitrage, gold and gold equities in the past. In general, he likes to try to lose less on the way down.
Over the past year, Astoria hasn’t done much trading because they built this year’s portfolio last year. It hedged for the anticipated rotation and inflation themes, but has selectively been adding some investment-grade credit and dividend strategies. Davi says the company owned more cash than usual recently but didn’t want to own excessive amounts because it loses its purchasing power over time. He has started extending duration a little bit and has used Treasury bond ladders to enhance yield. They generally don’t make big moves, such as cash straight into stocks, and prefer to make smaller adjustments periodically.
Other key takeaways:
- Earnings could decline 20% if we see a bad recession. Davi believes it will be a mild one because companies have improved balance sheets and the labor market is tight.
- Taxes matter a lot for investors and Astoria does do some tax loss harvesting. This is a year where you’re starting to see a lot of that and it could be more important to do it throughout the year. If we rally into the end of the year, you could lose the opportunity to take those losses.
- The profit cycle may be deteriorating. In a multi-asset portfolio, it’s good to have a lot of factors. He likes quality because it generally works. The market is telling us there is some trouble in value, but it’s also cheap.
- Davi isn’t a big fan of the new single stock ETFs. They’re tougher to use unless you’re a day trader and long-term portfolios don’t need it.
- The Fed needed to make a “dovish hike” recently because they put so much pressure early on. In Davi’s opinion, the Fed pivoted because they said some indicators were turning. Now, they don’t need to press as hard. He expects them to front load a 50 basis point hike in the fall and then maybe pause.
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