Our model indicated higher sentiment signals for IJH compared with IVV. Implied volatility and short interest are reading more negatively for large multinational companies at the moment. Smaller-cap companies, as a whole, are less dependent on international markets for growth, therefore they are likely to be less sensitive to lingering risk of the trade wars.

"NorthCoast Asset Management ETF portfolios again caught the large-cap rally in Q2 from a commitment to U.S. stocks. The firm made minor adjustments to its portfolios, but maintained large-cap and midcap ETFs among its top holdings with a cautiously bullish outlook. NorthCoast remained upbeat on bets in Pacific region and emerging market ETFs....." Read the full article by clicking the link below. 

Investing For Retirement: Large-Cap Rally Fuels Gains for NorthCoast ETF Portfolios

What is your outlook for the U.S. equity market for 2019?

Our global tactical asset allocation (GTAA) model still signals a relatively bullish outlook for the U.S. equities. Strong readings in sentiment and valuation indicators outweigh weaker technicals and recent price pullbacks. 

In 2018, the U.S. economy enjoyed a banner year with real GDP annual growth rate on track to increase by close to 3%, which is the strongest gain of the nearly decade-long expansion. We believe the deficit-financed tax cuts and government spending increases will continue to help the economy grow much of next year. We also expect the labor market to continue to grow and unemployment to stay low by historical standards. 

Despite these positive signals, we do recognize some possibilities of weakness moving forward. The stimulus effect might fade and put downward pressure on the market in the longer term and diminishing labor supply might result in gradually decreasing prices. The ceasefire between the U.S. and China may indicate that the worst of the escalations are behind us. However, the trade tension remains and might contribute to equity volatility. We do expect some market volatility to continue through 2019 despite our model indicating that the odds of a near-term recession remain relatively low.

The recent volatility has not significantly impacted our outlook as our model has been indicating that the fundamentals of the U.S. economy are still relatively sound. As a result, the market volatility has served as an opportunity to tactically add some U.S. equity exposure at lower prices. We see this volatility as a reaction to uncertainty. However, the uncertainty has not materialized into impactful changes to fundamentals.

Our outlook for the Eurozone (EZU) is relatively less optimistic compared to our view of the U.S. and some other international equity markets. Technical, sentiment and valuation signals remain in negative territory for the Eurozone. The region has been on an economic downtrend in 2018 and lost further momentum in the third quarter. Final GDP numbers confirmed that the region’s quarter-over-quarter GDP growth slowed to 0.2% from 0.4% in the second quarter.

Underlying economic momentum in the U.K. also remains fragile with the Brexit deadline looming. The uncertainty surrounding its outcome has been weighing on business investment.

The European Central Bank is scheduled to halt asset purchases associated with quantitative easing soon. However, this does not appear to be overly hawkish, or favoring inflationary policies, and has been expected. The economic union is moving to a more neutral fiscal policy stance after a very drawn-out period of quantitative easing.

Despite some unease in the U.S. stock market, it has performed significantly better than other major international equity markets. The divergence this year has been largest between U.S. and emerging market equities, which have lost roughly 10% YTD due to trade tensions and a rising U.S. dollar. U.S. small-cap stocks (IJR) have outperformed their large (IVV) and mid-cap (IJH) peers this year and our outlook remains more bullish for small-caps relative to these peers. Earnings have been one of the main drivers of the impressive U.S. equity market performance. Our outlook remains cautiously bullish with relatively strong technical, sentiment and macroeconomic signals. New economic data has also been solid recently. Payroll growth, initial jobless claims, retail sales, industrial production and consumer and credit sentiment have all been moving in positive directions.

With a dissapointing first half in emerging market equities (IEMG), what is the outlook for the second half of the year?

Our asset allocation model indicated a less bullish outlook for emerging market equities with valuation, macro and technical signals in negative territory. Macroeconomic data in the emerging market countries have failed to beat forecasts, as evidenced by a rapid decrease of the economic surprise index. China’s May economic activity data disappointed as fixed asset investment growth reached its lowest rate on record.

The important trade relationship between the U.S. and China has been fraught with friction for months. Tensions have been escalating in recent weeks as proposed tariff deadlines approach and both sides showing a reluctance to concede. The uncertainty and trade tensions have, in the short-term, negatively impacted financial markets. Souring investor sentiment from the heightened uncertainty is prompting more cautious economic behavior at a particularly inconvenient time.

U.S. small-cap equities (IJR) have had a pretty strong run this quarter, to what do you attribute this upswing and how do you like it on a protective basis?

Small cap companies have more to gain from deep corporate tax cuts introduced by the Trump administration this year as they have often paid higher effective tax rates than their larger rivals in the past. Also, since small cap companies are generally less internationally oriented, they are generally less vulnerable to the impacts of potentially escalating trade tensions between the United States and other countries.

Our outlook for IJR is relatively bullish as it scores the highest compared with U.S. large-cap equities (IVV), U.S. mid-cap equities (IJH) and other major international equity ETFs.

What has been the most notable fixed income performer in 2017 in your Diversified Core portfolios, and to what do you attribute its gains?

CLY, the iShares 10+ Year Credit Bond ETF, was certainly among the top performing fixed income positions in our Diversified Core portfolio this year. The security was up 12.1% and we currently hold about a 15% position in our portfolio. With the U.S. economy remaining fundamentally strong, the default rate of corporate bonds is relatively low. Our ETF scoring model showed an attractive aggregate score for CLY throughout the year with valuations and sentiment signals being the strongest contributors.

What drove the additional allocation to U.S. equities in the ETF portfolios and how do you like the asset class heading into 2018?

We increased exposure to IVV (iShares Core S&P 500 ETF) as our model indicated a relatively bullish outlook for the U.S. equity market with stronger sentiment and macroeconomic signals. Leading sentiment indicators climbed or stayed at high levels in 2017 and producer sentiment recently strengthened. The ISM manufacturing index remained solid the last three months driven by the belief that the U.S. manufacturing conditions are improving as the global economy has strengthened and the U.S. dollar has depreciated. The homebuilder sentiment index also climbed steadily this quarter hitting 74 in December, the highest level since July 1999, indicating that the housing market is well positioned for growth in the coming months. Macroeconomic data became more bullish with the labor market continuing to tighten. Weekly initial jobless claims fell four consecutive weeks in late November and early December while industrial production posted steady gains for the last three months of the year.

We remain cautiously optimistic heading into 2018, seeing both strong growth indications as well as some cautious signals. The steady pace of economic growth is likely to be among the most significant drivers for the domestic equity market going forward. With the tightening labor market, wage growth, and surging stock and housing prices, consumers were one of the strongest sources of growth and will be looked upon to continue driving the economy moving forward. However, with the winding down of quantitative easing and possibly higher interest rates, risks remain for U.S. equity prices. We monitor these risks daily, especially as stock market valuations remain stretched. We have a similar rational for mid-cap equities in IJH (iShares Core S&P Mid-Cap ETF) as we have for IVV, being cautiously optimistic about the U.S. equity market throughout 2017 and moving into 2018.

What factors led to the trimming of Canadian equities?

We trimmed EWC (iShares MSCI Canada ETF) in October as macroeconomic data in Canada turned downward. GDP growth rapidly decelerated in the third quarter, slowing from an annualized rate of 4.3% to 1.7% as diminishing demand for exports offset an increase in domestic demand. The housing market in Canada was also hurt by the tightening of monetary policy and higher interest rates.

What themes will you be focusing on in 2018 when you consider your Eurozone positions?

Our outlook for EZU (iShares MSCI Eurozone ETF) remains optimistic. The relatively strong economic growth was among the major drivers of the impressive performance of EZU for the year. The bullish sentiment signals such as the PMI signals also suggested that Eurozone industrial sectors are firing on all cylinders. The highly accommodative monetary policy from the European Central Bank (ECB) certainly contributed to the market rally this year. Going forward, we will continue to focus on the outlook of Eurozone economic fundamentals, the sentiment of the market and ECB’s monetary policy. Unlike the Federal Reserve, we expect the ECB to keep a more accommodative stance in the near future if the Eurozone inflation continues to be below-target.

For more commentary from CIO Patrick Jamin on the final quarter of 2017, Click Here

The Board of Trustees of iShares Trust has authorized a stock split for the iShares International Treasury Bond ETF (IGOV) for shareholders of record as of the close of business on August 28, 2017, effective after the close of trading on August 30, 2017.  Shares of the Fund will begin trading on a split-adjusted basis on August 31, 2017.The 2-for-1 split will lower the share price and increase the number of outstanding shares.

The total value of shares outstanding in your portfolio is not affected by the split. Detailed information is available on page 2 of the IGOV Summary Prospectus by clicking here. Additional information on stock splits can be found here. 

What is attractive about CLY (10+ Year Credit) right now?

The expectation of fewer future rate hikes makes U.S fixed income with relatively longer duration more attractive. Three out of four categories of our indicators are positive for CLY: valuation, technical and sentiment. The relatively high yield of CLY (4%) can be helpful in boosting the income for the strategy.

Given the current market conditions, our cash scaling model indicates a modestly bullish outlook on U.S equity market with a targeted investment level at around 85%. Instead of holding the remaining assets in cash equivalents, effectively yielding 0%, the strategy invests in CLY. However, we closely monitor the duration risk of the position.

What do you attribute the recent strength of IVV (S&P 500 Index) to with the S&P 500 setting new highs? And what is your sentiment going forward on the position?

We believe the fundamentals of U.S. economy are still sound.  The better than expected payroll employment in June indicated that the labor market has regained some momentum after the weaker data in May.   In fact, the job market has enjoyed the longest string of consecutive monthly job gains in the nation’s history.  Consistent with the steadfast job market is the acceleration in wage growth which is closer to 3% compared with 2% throughout much of the recovery.

U.S. manufacturing sector is showing signs of improvement with higher PMI data and improved industrial production. The key channel through which the British exit would harm the U.S. economy is through financial markets. But stock prices and credit spreads, which did suffer in the immediate wake of the vote, have recovered.

How does EZU (Eurozone) look to you right now? Are there any catalysts that jump out at you as being key to driving the pushing higher in the months ahead?

The estimate from economists is that GDP will be about a quarter point lower a year from now and about a half a percent five years from now for EU after the Brexit.  However, we believe that a lot of the downside risk has been reflected in the equity market prices by now.

Valuation and sentiment signals have improved recently for EZU. We expect that the ECB will deploy all policy instruments if necessary to boost the economy, including expanding asset purchases, injecting additional liquidity support, or lowering interest rates.  

After a five-month price decline, NorthCoast seeks to take advantage of current valuations by purchasing EEM (Emerging Markets) as technical and macroeconomic indicators turn positive. The position replaces exposure to EPP (Pacific ex- Japan). EPP experienced a similar drawdown over the last five months and was liquidated as it reached its designated sell-stop coupled with a diminished future return potential.

Another reduction in IVV occurred as our outlook in U.S. equities weakened relative to equities in Japan (EWJ). Valuation, macro and sentiment signals all dropped to negative territory. The reduction in U.S. equity exposure paved the way for an increased allocation to EWJ, given its relatively bullish technical, sentiment, macro and valuation signals in our ETF selection model. EWJ should benefit from Japanese pension plan reallocation from fixed income to equities, massive asset purchasing by Bank of Japan, low interest rate environment and improving corporate governance of Japanese firms.

Another reduction in U.S. equities occurred with small-cap stocks (IJR) getting trimmed as our outlook in U.S. equities weakened relative to our positive signals in EZU (Eurozone). Momentum continues to improve in Europe with an attractive entry level. Therefore, a 5% buy in EZU replaced the 5% sell in IJR.

Diversified Core shifted global allocation in March as it increased exposure to Japan (EWJ) and the Pacific ex Japan (EPP) and reduced exposure to large and mid-cap U.S. equities (IVV/IJH). The strategic change comes as U.S. valuations draw concerns while outlook for international equities continues to improve.