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Two years after the steep recession of 2008-2009, the economy appeared to be picking up steam, only to have the pace of growth sputter and potentially stall. The reason for this rather disappointing comeback is the nature of the downturn itself. Not only did we have a traditional economic recession as part of the normal business and inventory cycle, but on top of it we suffered a far less frequently occurring credit recession which resulted from everyone-public sector and private-borrowing too much, spending too much, and expanding their debt.
The economy now faces headwinds because of the lingering effects of the credit recession, which will likely cause another contraction in early 2012. The good news, however, is this downturn will be comparatively mild and will likely spark positive changes, particularly with regard to reducing personal debt levels, that could really get things moving again.
Faced with the prospect of an economic contraction and perhaps a full-fledged recession (albeit milder than 2008-2009), investors would do well to become more defensive in their portfolios. The objective is not to catch the bottom or call the top, but to reduce volatility, preserve and protect capital, and provide peace of mind through periods of uncertainty.
At Astor Asset Management, we utilize a macroeconomic model, investing based on the current economic trend. During periods of market expansion, we use long ETF positions in diversified non-correlating market averages to provide positive returns. During economic contractions, we become defensive, which may mean overweighting cash and fixed income using ETFs, or even inverse exposures to broad market averages using ETFs that gain in value when indices decline. Our overall goals are to achieve a less volatile return and a better risk-return ratio than our benchmark.
What matters most to the firm is not a particular direction of the economy, but the ability to identify it. We...