The ETF Portfolio Strategist: 21 Oct 2020

Flatlining To The Election: With less than two weeks until the US election, it’s becoming harder to focus on anything else. Maybe that explains why multi-asset-class strategies continue to meander in a relatively tight range.

Even without a high-stakes election approaching it would be reasonable for markets to take a breather after the strong bull run since the coronavirus bottom in late-March. Every slice of the major asset classes have bounced sharply since the dark days of early spring, but the upside momentum has conspicuously slowed or reversed in recent weeks and it’s a reasonable guess that investors are inclined to take a wait-and-see approach to money management until it’s clear if the living quarters of the White House will be redecorated in the new year.

Our global benchmarks our holding on to gains year to date, mostly due to solid 2020 advances in US stocks (VTI), shares in Asia ex-Japan (AAXJ) and US Treasuries and investment-grade corporates (IEF and LQD). Otherwise, thin gains and losses prevail this year through today’s close (Oct. 21).

Mr. Market’s asset allocation (GMI) continues to win the 2020 horse race relative to our other two global benchmarks (G.B16 and G.B5), although the US 60/40 stock/bond mix (US.60.40) remains the leader for now. (For details on all the strategies and benchmarks, see this summary.) 

Turning to ETF-PS’s three proprietary strategies, Global Managed Volatility (G.B16.MVOL) still has the upper hand for 2020 with a near-19% year-to-date gain. Notably, the strategy continues to reflect a risk-on posture in all 16 funds (which are the same tickers held in G.B16). By contrast, Global Managed Drawdown (G.B16.MDD), which holds the same 16 ETFs, is still a mixed bag of risk-on and risk-off signals – a profile that, so far, has kept the strategy in a distant second-place position this year relative to G.B16.MVOL.

For about two months now, all three proprietary strategies (along with G.B16) have been treading water. Is this the calm before the electoral storm? Probably, although the tougher question: How will markets react in the post-election phase? Part of the answer, perhaps most of the answer, depends on who wins. The expected policy implications, after all, are stark and so it would be more than slightly surprising if investors don’t vote with their money right after casting their electoral ballots. ■

Meantime, markets appear to be biding their time and looking for clues on how to price assets post-Nov. 3. It’d be foolish to assume that no market-moving news is possible ahead of the election. Then again, it’s easy to imagine that prices won’t materially change between now and the close on election day. ■