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 exposure to real estate in the portfolios in 2018 has been iShares U.S. Real Estate ETF (IYR). With interest rates and bond yields still being relatively low, IYR (a securitized portfolio of properties) offers the income potential of real estate combined with the liquidity of stock. The yield of 3.8% has produced a relatively solid source of income for the portfolios. Moving into 2019, we are closely monitoring the trend of rising interest rates because it can put pressure on the rate-sensitive prices of REITs.

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.

What is your outlook currently for the Eurozone (EZU) particularly in regards to talks of U.S. trade protectionism?

First quarter final GDP numbers for the Eurozone confirmed that the region’s growth slowed at the start of 2018. A broad-based slowdown in investment was the main factor behind the easing of the Eurozone’s first quarter GDP growth rate. Eurozone industrial output, which fell by 0.9% month-over-month in April, and a weak energy sector were additional factors.

Our asset allocation model indicates a neutral-to-slightly negative outlook for the region with valuation, sentiment and technical signals all in negative territory. In the near term, souring sentiment due to trade uncertainties will likely keep investment subdued and impact manufacturing in major Eurozone countries. With the exception of May, the IFO sentiment index has decreased each month in 2018. Germany’s ZEW Indicator of Economic Sentiment has plunged by a cumulative 36.5 points over the past six months.

What appeals to you about U.S. large-cap equities (IVV) heading into the second-half of the year?

The U.S. economy is still fundamentally strong with job growth accelerating since September 2017 and unemployment rates reaching new lows. Wage growth, as measured by the employment cost index for private wages, has also been rising which is generally consistent with the tightening labor market and a narrowing in the unemployment rate gap. Manufacturing has become one of the stronger components of the U.S. economy with almost all of the regional economies picking up steam in recent months. As a result of this positive economic data our market timing model shows a slightly more bullish outlook for the U.S. equity market compared with the first quarter’s outlook.

Sentiment remains optimistic as the U.S. consumer is feeling more upbeat about its current financial situation. However, the Trump administration’s formal announcement of additional tariffs on Chinese imports has raised concerns about trade tension between the two largest economies in the world. These tariffs could increase uncertainty and weigh heavily on financial market conditions and the collective sentiment.

What drove the additional allocation to U.S. equities in the growth 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 appealed to you about emerging markets that has led to an increased allocation to the position?

Emerging market equities were among 2017’s top gaining asset classes. Our model indicated a high score for IEMG (iShares Core MSCI Emerging Markets ETF) led by its macro and sentiment components, which are among the highest compared to other international equity ETFs. Manufacturers and exporters in many Asian markets received a boost recently, benefiting from the upswing in the global tech cycle. As a result, manufacturing sentiment improved. Macroeconomic signals also increased in recent months, particularly leading economic indicators and retail sales.

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

Tactical Growth ended 2016 with a total return of 7.7%, outperforming the average competitor in the tactical space and also keeping in line with the aggressive MSCI All-Country World Index (ACWI). While the defensive positioning away from equities in general detracted from performance, for the most part our ETF selection benefited the portfolio in both equity ETFs (overweight to U.S. small and mid-cap equities and Canadian equity market, underweights to UK and Japanese equities), and fixed income ETFs (overweight in corporate, emerging-market and high-yield bonds)...

Read the entire year-end review for Tactical Growth 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.  

The following question often arises from investors when incorporating global strategies into a portfolio; “Is there an effective and efficient way to manage currency risk?”

The question is relevant for investors utilizing our Tactical Growth or CAN SLIM® International strategy, as these strategies invest in international equities. It’s even more pertinent when global exchange rates diverge. To best answer the question, we’ve conducted extensive research and tackled the issue from multiple angles including the impacts on volatility, historical performance, potential future performance, costs, and additional business forces.

Click the image link below for the full report. 

After the dust settled following a few rocky months of market volatility, conviction swayed away from emerging markets and back toward developed markets such as the U.S and the Eurozone. Over the course of October, Tactical Growth removed exposure to EEM (emerging market equities) and EMB (emerging market bonds) as as macro-economic signals showed signs of deterioration in emerging markets. Exposure in IVV (U.S. large-cap equities) was reduced earlier in the month due to lower macroeconomic signals after the quick equity rebound. The available cash was put to work in IJH (U.S. small-cap equities) and EZU (Eurozone), as the outlook in developed markets increased throughout the month.

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.

Economic activity in the eurozone grew at the fastest pace in four years in June, providing the latest sign that a recovery in the region is gaining traction. This news provides conviction in the Eurozone just days after Tactical Growth added 5% to its position in IEV (iShares Europe ETD), increasing exposure to the region from 18% to 23%.

Over the month, Tactical Growth reduced U.S. equity exposure (IVV, IJR) and increased its positions in the Eurozone (EZU). U.S. equities still remain the top holding as CIO Patrick Jamin explains, "Out of all of the global economies, the U.S. economy has showed the most consistent strength."

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

Tactical Growth 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.

Outlook for U.S. equities weakened with our valuation indicators showing cause for concern as stocks reach another all-time high. Tactical Growth reduced its exposure by 2% across each of its U.S. equity holdings, IVV, IJH, IJR.

As 2015 gets underway, international equities provided a boost to counteract the drop in U.S. holdings. Tactical Growth continued to favor equities for the near-term and increased equity exposure to 100%, from 85% in December. The strategy dropped its three fixed income positions (MBB, HYG, CLY) to increase allocations for large-cap (IVV) and small-cap (IJR) U.S. equities.

2014 Strategy Review -- Click here for the full report: http://www.northcoastam.com/pdf/strategies/2014-Strategy-Review-TacticalGrowth.pdf

After conducting additional research into specific regions, Tactical Growth sold its EFA position and concentrated the weighting into EWJ (Japan), EPP (Pacific ex-Japan), and EZU (European Union). As international markets remained unstable, the strategy increased its U.S. Large-Cap and Mid-Cap exposure in IVV and IJH.