Aptus Impact Series HNW Composite Fact Sheet

The post Impact Series HNW Allocations appeared first on Aptus Capital Advisors.

Aptus Impact Series ETF Composite Fact Sheet

The post Impact Series ETF Allocations appeared first on Aptus Capital Advisors.

Aptus Firm Overview

The post Aptus Firm Overview appeared first on Aptus Capital Advisors.

Upside Capture Through Downside Protection

Our approach is designed to produce what every
investor wants, potential for growth and income while
defending against their most feared risks. Today’s
backdrop requires different thinking; here is ours.

Download Here

The post Aptus Investment Methodology appeared first on Aptus Capital Advisors.

(Click above for the full update)

This is our biggie each quarter, pages of charts and the context to go with them. As always, we think the windshield view is far more relevant than the rearview. But it’s through the rearview that we get a sense of the path traveled to this point, helping to set the course ahead. Executive summary here:

The Good

The U.S. Consumer Continues to be Resilient

We believe the aggregate consumer remains flush with cash, and the once pent-up demand continues to be unleashed, which has allowed the U.S. economy to be very resilient. The average U.S. Household is worth 35% more than pre-COVID. Consumer balance sheets are also well fortified.

Labor Market Remains VERY Resilient

There has never been a recession that did not witness a material increase in the unemployment rate, which remains “stubbornly” below 4%. And while the labor market does appear to be slowly weakening, it has thus far remained very resilient, with respectably high wage growth as well.

The Bad

Inflation is Persistent, Though Peaking?

The magnitude of the policy actions used to counteract deflation may, in the end, be hugely inflationary. Higherthan-expected inflation tends to be a major headwind to equity valuations, but it appears that inflation has peaked for now. For markets, how the Fed chooses to address inflation is as important as the inflation itself. The battle isn’t over, as services and wage inflation continue to be “sticky”.

Fed Policy Collateral Damage

The yield curve officially inverted in 2022, creating speculation of a recession. This means caution in communication by the Fed to avoid the mistakes of the Yellen Fed and the “stop-and-go” policy from the ’70s. The Fed’s number one goal is to anchor inflation, even if it puts the economy into a recession. With this, there may be some collateral damage in parts of the speculative market, as we’ve already seen in the banking sector.

The Ugly

Inflation Transitioning to Growth Frustration

Earnings expectations for the S&P 500 have only come down 9.1% in ‘23. Anecdotally, margins continue to compress at the corporate level, but have not yet been represented in overall analyst’s future expectations. We believe that if earnings were to significantly drop (for reference, they tend to fall ~20% during a recession), the market could follow, as lower revenue could mean lower earnings.

Risk of a Recession

An inverted yield curve has preceded almost every recession, though it has difficulty on properly calling the timing. The yield curve is the most inverted it’s been during this cycle. If consumer spending starts to slow, the economy could witness a stagflationary environment where inflation is structural, growth is slowing, and unemployment increases. Adding to that pressure, it seems that Central Banks are content to tighten until labor markets weaken.

Click here for the full presentation, enjoy!

Disclosures

Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The information contained herein should not be considered a recommendation to purchase or sell any particular security.

The opinions expressed are those of the Aptus Capital Advisors Investment Team. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed.

The S&P 500® Index is the Standard & Poor’s Composite Index and is widely regarded as a single gauge of large cap U.S. equities. It is market cap weighted and includes 500 leading companies, capturing approximately 80% coverage of available market capitalization.

Aptus Capital Advisors, LLC is a Registered Investment Advisor (RIA) registered with the Securities and Exchange Commission and is headquartered in Fairhope, Alabama. Registration does not imply a certain level of skill or training. For more information about our firm, or to receive a copy of our disclosure Form ADV and Privacy Policy call (251) 517-7198. ACA-2307-2.

The post Q2 2023 Recap and Chart Book appeared first on Aptus Capital Advisors.

(Click above for the full update)

This is our biggie each quarter, pages of charts and the context to go with them. As always, we think the windshield view is far more relevant than the rearview. But it’s through the rearview that we get a sense of the path traveled to this point, helping to set the course ahead. Executive summary here:

The Good

The U.S. Consumer Continues to be Resilient

We believe the aggregate consumer is flush with cash, and once pent-up demand can safely be unleashed, the U.S. economy can continue being resilient. The average U.S. Household are worth ~30% more. Consumer balance sheets are well fortified and flush with cash.

The Bad

Inflation is Persistent, Though Peaking?

The magnitude of the policy actions used to counteract deflation may, in the end, be hugely inflationary. Higher-than-expected inflation tends to be a major headwind to equity valuations, but it appears that inflation has peaked for now. For markets, how the Fed chooses to address inflation is as important as the inflation itself. The battle isn’t over, as services and wage inflation continue to be “sticky”.

Fed Collateral Damage

The yield curve officially inverted in ’22 creating speculation of a recession. This means caution in communication by the Fed to avoid the mistakes of the Yellen Fed and the “stop-and-go” policy from the ’70s. The Fed’s number one goal is to anchor inflation, even if it puts the economy into a recession. With this, there may be some collateral damage in parts of the speculative market.

The Ugly

Inflation Transitioning to Growth Frustration

Earnings Expectations for the S&P 500 have only come down 9.1% in ‘23. Anecdotally, margins continue to compress at the corporate level, but have not yet been represented in overall analyst’s earnings expectations. We believe that if earnings were to significantly drop, which they tend to fall ~20% during a recession, the market could follow, as lower inflation could mean lower earnings.

Debt Ceiling

In the last major debt crisis, the market learned that the process is just as important as the outcome. Yet, during this time period, stocks fell 20% amid political uncertainty. This go-around, the government’s budget will be jawboning with increased interest rates that will drive interest expenses higher, as 50% of the U.S. debt comes due in the next three years that are currently financed at much lower rates.

Click here for the full presentation, enjoy!

Disclosures

Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The information contained herein should not be considered a recommendation to purchase or sell any particular security.

The opinions expressed are those of the Aptus Capital Advisors Investment Team. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed.

The S&P 500® Index is the Standard & Poor’s Composite Index and is widely regarded as a single gauge of large cap U.S. equities. It is market cap weighted and includes 500 leading companies, capturing approximately 80% coverage of available market capitalization.

Aptus Capital Advisors, LLC is a Registered Investment Advisor (RIA) registered with the Securities and Exchange Commission and is headquartered in Fairhope, Alabama. Registration does not imply a certain level of skill or training. For more information about our firm, or to receive a copy of our disclosure Form ADV and Privacy Policy call (251) 517-7198. ACA-2301-2.

The post Q1 2023 Recap and Chart Book appeared first on Aptus Capital Advisors.

The Good

The U.S. Consumer Continues to be Resilient

We believe the aggregate consumer is flush with cash, and once pent-up demand can safely be unleashed, the U.S. economy can continue being resilient. The average U.S. Household are worth ~30% more. Consumer balance sheets are well fortified and flush with cash.

The Bad

Inflation is Persistent, Though Peaking?

The magnitude of the policy actions used to counteract deflation may, in the end, be hugely inflationary. Higher-than-expected inflation tends to be a major headwind to equity valuations, but it appears that inflation has peaked for now. For markets, how the Fed chooses to address inflation is as important as the inflation itself. The battle isn’t over, as services and wage inflation continue to be “sticky”.

Fed Tightening Misstep

The yield curve officially inverted in ’22 creating speculation of a recession. This means caution in communication by the Fed to avoid the mistakes of the Yellen Fed, namely slowing the flow of liquidity to main street by redirecting said liquidity towards Wall Street, i.e., pivoting. The Fed’s number one goal in to anchor inflation, even if it puts the economy into a recession.

The Ugly

Inflation Transitioning to Growth Frustration

Earnings Expectations for the S&P 500 have only come down 9.1% in ‘23. Anecdotally, margins continue to compress at the corporate level, but have not yet been represented in overall analyst’s earnings expectations. We believe that if earnings were to significantly drop, which they tend to fall ~20% during a recession, the market could follow, as lower inflation could mean lower earnings.

Click here for the full presentation, enjoy!

Disclosures

Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The information contained herein should not be considered a recommendation to purchase or sell any particular security.

The opinions expressed are those of the Aptus Capital Advisors Investment Team. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed.

The S&P 500® Index is the Standard & Poor’s Composite Index and is widely regarded as a single gauge of large cap U.S. equities. It is market cap weighted and includes 500 leading companies, capturing approximately 80% coverage of available market capitalization.

Aptus Capital Advisors, LLC is a Registered Investment Advisor (RIA) registered with the Securities and Exchange Commission and is headquartered in Fairhope, Alabama. Registration does not imply a certain level of skill or training. For more information about our firm, or to receive a copy of our disclosure Form ADV and Privacy Policy call (251) 517-7198. ACA-2301-2.

The post Q4 Recap and Chart Book appeared first on Aptus Capital Advisors.

“O Muse!,

Sing in me, and through me, tell the story,

Of that skilled investor, in all ways of contending,

An asset allocation, searching for alpha years on end…”

An Invocation of Muse serves as a prologue of events to come, or an outlook in this case, famously used by Homer when writing his two major epic poems, the Iliad, and the Odyssey. Now, in modern times, used by the Coen Brothers in their satirical comedy, O Brother Where Art Thou?

The movie, at its core, is a work of comparative mythology, blended with the American South. The protagonist, Ulysses Everett McGill, leader of the Soggy Bottom Boys, led two fellow jailbirds across Mississippi in pursuit of a treasure, all while evading the evil Sheriff Cooley, who was hot on their trail.

Investors themselves are on their own archetypal journey as they try to navigate the market, seeking the treasure of risk parity. Except, there are multiple evil Sheriff Cooley’s in the form of rising inflation expectations, a potential earnings recession, coupled with a monetary policy change that has no comparative period. These factors are the microcosm as to why traditional fixed income securities have been unable to provide safety this year to an overall asset allocation.

But, like any archetypal journey, there will be lessons learned along the way – this year was no different. And in a year in which macroeconomic factors were the lead determinant, i.e., interest rates and the Fed, it’s very easy to get enamored with forecasting and guessing what each data point would be. We take very little stock in doing this because most investors cannot accurately model what macro events lie ahead or, more importantly, how the markets will react to the things that do happen. Long time investor, Bruce Karsh, has emphasized that it is very difficult to know what expectations regarding certain events are already incorporated into security prices, which will ultimately drive price movements.

This is one of the main reasons as to why most people cannot predict the future well enough to repeatably produce superior performance – we believe it’s a losing game.

One of the most influential things we’ve all learned is that short-term events do not matter. In the moment, they will feel like they do, but they simply will not add value over longer periods of time.

Howard Marks mirrors our sentiment in this example:

“…in late 2015, virtually the only question I got was “When will the first rate increase occur?”  My answer was always the same: “Why do you care?  If I say ‘February,’ what will you do?  And if I later change my mind and say ‘May,’ what will you do differently?  If everyone knows rates are about to rise, what difference does it make which month the process starts?”  No one ever offered a convincing answer.  Investors probably think asking such questions is part of behaving professionally, but I doubt they could explain why. “

This view is also why Aptus’ Investment Methodology engages in Simple beats Complex. Investors need to focus on what they can control and prepare for what they cannot. It is not about maximizing opportunity, but more about minimizing the losses.

Focusing on the day-to-day noise can put investors in a tight spot, as many can lose sight of the big picture. This is why advisors know that the first level of defense for a portfolio is the asset allocation, allowing them to prepare for what they cannot control.

In this outlook, we’ll do our best to not focus on the individual data points, but rather on themes that we believe could matter moving forward.

The Recap – Investors May Need to Curb Their Enthusiasm in 2022

Being an investor in this market has left many people feeling like they’ve been hit by a train. But, per Penny, Ulysses’ wife, lots of respectable people have been hit by trains. In fact, the S&P 500 marked an all-time high on the very first trading day of ‘22, and the time since has seen one of the worst periods in history for a linear combination of stocks and bonds.

Heading into ‘22, the past ten years rewarded households with arguably what could be the best stock return spreads of their lifetime. Moreso, the three-year annualized returns for the S&P 500 and U.S. Barclays Agg were 26.0% and 4.8%, respectively – and this time frame included a global economic shutdown.

Given where valuations and interest rates were, we believed that there would be a need for investors to Curb their Enthusiasm heading into 2022.

And this is exactly what happened creating a perfect storm for portfolios, as it wasn’t your average mom and dad recession. And for many, it wasn’t even your normal grandma and grandpa recession.

The high velocity spike in interest rates this year has been the reason for both equity and bond performance. Higher rates have hurt longer duration fixed income investments, as reinvestment risk is introduced. For equities, higher rates mean a higher discount rate, compressing valuations. In our opinion, rates have been driving the market’s performance all year, and may not likely change in the interim.

Now that ‘22 is in the rearview, let’s focus on next year.

Enter 2023 – A Market Potentially in Constant Sorrow

2021: The Path of Least Resistance is Up, But We May Encounter some Volatility

2022: Investors May Need to Curb Their Enthusiasm Moving Forward

2023: A Market in Constant Sorrow

We’ll be the first to admit, this year’s theme may be a bit more draconian than one would imagine after the year that risk-parity has had, but we’d emphasize the word “constant” in this phrase, more than “sorrow”. Yes; we may expect less pain next year (price volatility), but that doesn’t always translate into gain (market returns).

We believe that the market will begin a transition on where it will focus its attention in the future:

• Initially, the market will continue to be fixated on the Fed and the likelihood of a pivot or slowdown in rate hiking, continuing to cause volatility in valuations and rates.

• Thereafter, the market will start to focus on the possibility of a recession, i.e., inflation to growth frustration.

This will create a momentous shift from the Fed to the real economy.

One of the largest surprises for us over the last year has been that the “rate shock” and “inflation shock” caused a historic bear market on Wall Street, but no “recession shock” on Main Street. Thus, we need to focus on the duration of resiliency for the consumer this year and when it could begin affecting the nominal economy.

Given our focus on the real economy, coupled with the inversion of the yield curve intensifying both in magnitude and in totality, we remain focused on the same framework when assessing the health of the market: 1) Expectations around the anchoring of future inflation, and 2) Identifying growth drivers that will incentivize private capital to invest in the real economy.

Collectively, success on inflation and valuation should help stocks to stop going down and, either begin a period of repair, or start going up. The durability of any advance would, in turn, be predicated on the emergence of organic drivers of growth as we transition into the second half of next year.

Said another way, without depressed valuations, for the markets to trough, investors need to see a peak in inflation and rates, or a trough in economic activity.

We believe that a policy error has already been committed by the Fed. The real and long-lasting policy error would be if inflation were to become unanchored, thus the emphasis on the market focusing on price stability, specifically wage inflation, in the near-term.

History shows us that markets are a sprint lower and a marathon higher. With the potential for slowing global growth and a less accommodative Fed, this marathon may include more hills than plains, which could create constant volatility in the market.

Ultimately, we do believe that the market has become more rational for longer-term investors, as valuations and rates have become more palatable than where we were just one year ago.

In the near-term, we do not think that investors have been given the all clear sign to seek the treasure. Much like in The Odyssey and O Brother Where Art Thou, market participants will continue to be tempted by different sirens, luring investors off course during their quest for financial independence. The market has been looking for any sign to believe that the Fed will “pivot”, and we believe, in the near-term, that this term will likely be revered as the new “transitory”.

Given that we are not looking to make specific calls on the market, we’d prefer to focus on what we believe could be three recurring themes next year. In fact, they directly correspond to our Yield + Growth Framework, but in reverse order.

1. Valuation: The Initial Focus – Assessment of Fed Policy Driving Investor Sentiment
2. Growth: The Latter Focus – Inflation to Growth Frustration
3. Yield: The Year of the Yield

The Sentiment Gauge: The Fed and Policy Moving Forward

The market is likely coming closer to the final stages of the Fed’s tightening move. During this year, there have been nearly 400bps of short rate tightening. Add to that, $95B/per month in Quantitative Tightening, leading the Fed to start watching the long and variable lags associated with this very aggressive tightening.

Jerome Powell, the leader with the capacity for abstract thought, has completed the heavy policy lifting of this tightening schedule, allowing the rest of his “brain trust” the ability to slow down policy response before fine tuning it in ’23. We believe that a Fed policy pivot will have nothing to do with Wall Street, rather, it will come from successfully anchoring long-run inflation expectations. The timing of this remains unknown, given the stickiness of wage inflation.

Specifically, we believe that markets should understand that sharp risk-asset rallies on any policy pivot expected by the market could be leaned against. After last year’s snafu that inflation is transitory, the Fed’s credibility on not allowing inflation to “R-U-N-N-O-F-T”, i.e., anchoring inflation, continues to be front and center. We expect policy response to remain heightened to avoid the “stop-and-go” mistake of the 1970s. This alternative approach of “hike-and-hold”, allowing rates to marinate, as effects tend to be lagging, could require time, keeping policy in restrictive territory.

As we begin to look towards 2023, focus of the markets will eventually turn towards the economy and earnings, specifically to learn how much growth will slow and earnings will fall. But before that can occur, the Fed must “finish” its rate hike campaign. So for the interim, we believe that the single biggest influence on the market remains the Fed and the impending rate hikes.

The Growth: Inflation to Growth Frustration

As the market transitions into the latter half of the next year, and policy from the Fed becomes more clear, we believe that investors will ultimately shift their attention to slowing growth. Economic price levels, vis-à-vis the “money illusion,” may continue to mask the impact slowing activity has, and will have, on corporate revenue and earnings because operating margins provide important visibility into the acute pressure corporate operators could potentially be under.

Over the next year, we don’t believe that market expectations fully reflect the potential for an earnings recession or the resulting drag on corporate profitability, as companies will no longer be able to pass on price increases. At present, while near-term growth has been resilient, consensus forecasts of growth for next year continue to decrease.

Historically, during a recession, earnings have declined almost 13% from previous year’s end. So far, in 2022, earnings for next year are still 5.0% above beginning of the year levels. Not only that, but 2024 still has the expectations that earnings will grow over 14%.

We know that a robust economy is fundamental to achieving healthy returns from financial markets –everything from monetary policy, to interest rates to company earnings are linked to this. Ultimately, we believe the market will start to discount the potential for a decline in earnings estimates, as inflation will turn into growth frustration.

The Year of Yield

For the first time since the financial crisis, investors have finally been given the chance to take the yield bird in hand over the two growth birds in the bush. In a world of free money and cheap capital, a.k.a., quantitative easing, yield tends to be a less contributing factor to total return. As the market continues to transition into a higher-for-longer environment, we would put more emphasis on sustainable yield, than growth.

To this point, historically, yield has contributed to 36% of total return. Yet, in the 2010s, it only contributed 14%. It’s not the fact that we believe yield will be the sole contributor to performance itself, but also because the other two components of total return, growth and valuation, appear to be a difficult area for potential appreciation in the near future.

As investors wait for the near-term headwinds to abate, income is a space that they should embrace, an opportunity that has not presented itself for a very long time.

Bringing it All Together

Over the course of the year, investors have begun to realize that as the market evolves, you must evolve with it, or get left behind. The route to being successful this year was taking the road not often taken, and we believe that to be true moving forward. This road may or may not be smoother relative to last year, but investors need to remain tactical and make choices without regret. We’ve said that there may be less pain, but that doesn’t always translate to gains.

While we remain cautious on the markets, there is a silver lining that can make long-term investors once again a suitor. Throughout the year, the market has had a reset not just on valuations, which entered the year at 21.5x forward earnings, but also on interest rates not seen since 2007. The broad landscape appears much healthier than where it was to begin the year.

Fixed income broadly offers more attractive risk/reward. Bonds should become less positively correlated with equities and provide some diversification benefit, but until central banks stop hiking and inflation normalizes, bonds are unlikely to be a reliable buffer for risky assets.

We remain cautious on equities given that we don’t believe pricing fully reflects a recession expectation and the resulting drag on corporate earnings. Strategically, we expect the overall return of stocks to be greater than fixed income over the coming decade because we think central banks will ultimately live with some inflation. Staying invested in stocks is one of the best ways to get exposure to this trend.

Over long periods of time, valuation do matter. In fact, valuations explain ~80% of subsequent 10YR returns for the S&P 500. In our view, this year’s bear market provides an attractive opportunity for long-term investors.

Moreover, the best arbitrage opportunity for stocks is time. Lengthening one’s time horizon has been a recipe for loss avoidance. This is a benefit unique to stocks. Remember, market timing is very difficult, as an investor needs to be correct twice – once on the purchase and once on the sale. Not only that, panic selling can result in outsized opportunity costs, as the best market days often follow the worst days.

It is near impossible to predict the future, that’s why it’s important to plan and prepare. The advantage of owning volatility as an asset class gives investors the chance to take the road less traveled. By doing so, it gives one the opportunity to makes choices, yet minimizes regret and mistakes.

We believe the market will continue to tempt investors with different sirens, luring investors off course during their quest for real returns. What those exact sirens will be are unknown. Preparation is the key to success, and we believe it gives you the advantage to make sure that you won’t be living in a Market of Constant Sorrow.

Let’s Put Things into Perspective

As we do every single year, we want to leave you with a big picture investment thought alongside an uplifting message that makes us all take a deep breath and look at things from the perspective of life outside of finance.

1. Market Perspective: We’re about to break rule #1 for us – quoting Warren Buffett. There are already 1 million charlatans out quoting him, so we don’t want to be one. It’s no secret that there is volatility all around us – market, geopolitical, societal, etc., and while it may be difficult to see how today’s situation resolves itself in a tidy fashion, let’s conclude with a little bit of optimism. Warren Buffett wrote this in a 2008 annual letter:

“In the 20th century alone, we dealt with two great wars (one of which we initially appeared to be losing); a dozen or so panics and recessions; virulent inflation that led to a 21.5% prime rate in 1980; and the Great Depression of the 1930s, when unemployment ranged between 15% and 25% for many years.  America has had no shortage of challenges.  without fail, however, we’ve overcome them.  in the face of those obstacles — and many others — the real standard of living for Americans improved nearly seven-fold during the 1900s, while the Dow Jones Industrials rose from 66 to 11,497.”

2. Life Perspective: Coinciding with last year’s message of “Time Billionaire”, we want to focus on how people spend their time. Don’t worry, we won’t tell you where to spend it. As we go through life, we build personal relationships with different people – family, friends, coworkers, partners. These relationships, which are deeply important to all of us, evolve with time. As we grow older, we build new relationships while others transform or fade, and towards the end of life many of us spend a lot of time alone.

Viewing the evidence together, the message is not that we should be sad about the prospect of aging, but rather that we should recognize the fact that social connections are complex. We often tend to look at the quantity of time spent with others as a marker of social well-being; but it’s the quality of time spent with others that contribute to our feelings of connection or loneliness.

At Aptus, we are privileged to partner with every one of you. We are blessed to have all of our new relationships, and for those relationships that we’ve had for a long time – we would not be who we are without each and every one of you. Each of you reading this outlook is the life blood of our company, and we couldn’t be prouder of everyone being a part of our lives.

We wish everyone a safe and healthy new year.

Disclosures

Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The information contained herein should not be considered a recommendation to purchase or sell any particular security. Forward looking statements cannot be guaranteed.

This commentary offers generalized research, not personalized investment advice. It is for informational purposes only and does not constitute a complete description of our investment services or performance. Nothing in this commentary should be interpreted to state or imply that past results are an indication of future investment returns. All investments involve risk and unless otherwise stated, are not guaranteed. Be sure to consult with an investment & tax professional before implementing any investment strategy. Investing involves risk. Principal loss is possible.

When a page is marked “Advisor Use Only” or “For Institutional Use”, the content is only intended for financial advisors, consultants, or existing and prospective institutional investors of Aptus. These materials have not been written or approved for a retail audience or use in mind and should not be distributed to retail investors.  Any distribution to retail investors by a registered investment adviser may violate the new Marketing Rule under the Investment Advisers Act.  If you choose to utilize or cite material we recommend the citation, be presented in context, with similar footnotes in the material and appropriate sourcing to Aptus and/or any other author or source references. This is notwithstanding any considerations or customizations with regards to your operations, based on your own compliance process, and compliance review with the marketing rule effective November 4, 2022. 

Advisory services are offered through Aptus Capital Advisors, LLC, a Registered Investment Adviser registered with the Securities and Exchange Commission. Registration does not imply a certain level or skill or training. More information about the advisor, its investment strategies and objectives, is included in the firm’s Form ADV Part 2, which can be obtained, at no charge, by calling (251) 517-7198. Aptus Capital Advisors, LLC is headquartered in Fairhope, Alabama. ACA-2212-10.

The post 2023 Market Outlook: “A Market in Constant Sorrow” appeared first on Aptus Capital Advisors.

Source: BAML. As of 09/30/22

It has also been a choppy year for equities. We are currently in what appears to be another bear market rally. Since the October 13th lows the market is ~+12% higher. This rally makes for the 5th rally >8% since the beginning of the year. Each time prior, we’ve made lower lows…will this time be different?

Source: Charlie Bilello. As of 10/31/22

On to the fun stuff… we’ve got quite a bit to accomplish in this note and the corresponding rebalance you’ll see across your account the next couple weeks. We will start off with the largest change and work our way down. 

JUCY!!! 

You asked and we delivered … Aptus finally has a TRUE income fund. We are very excited for the combination JUCY brings to our aggregate fixed income portfolio. Given the increase in bond yields, we’re able to start at yield levels we haven’t experienced in some time (or ever within an Aptus ETF vehicle). Higher nominal returns will boost potential portfolio returns looking ahead. As far as JUCY goes, we are excited for the combo of yield from the government bond portfolio (85% of the portfolio) along with the elevated level of volatility within equity markets which will allow for increased income from the options overlay portfolio via ELNs (15% of the portfolio). Interest rates and volatility will impact yields, but as of early November we believe the strategy will provide an overall yield in the 8% range. We believe the combination of the two ETFs (JUCY + DRSK) will continue to be a game changer for our overall allocation while allowing us to stay away from traditional fixed income. The allocation to JUCY will be most heavy in the Preservation and Conservative allocation and decrease as we move up the risk tolerance. 

To read more on JUCY, see the  JUCY Fact Sheet.

Slight Decrease to International

We all know the picture across the pond and in general outside the US isn’t pretty. Between war, new communist manifesto, record energy prices, and the US dollar wrecking ball, foreign economies are struggling. While the famous Warren Buffett quote about buying when there is blood in the streets could apply here, we’d prefer to take our chances and take chips off the table for now. This might not be the “forever” allocation, as we will be quick to “pivot” if we see a change within Fed policy that weakens the USD or a substantial shift in political winds, specifically within energy policy ex US. This trade is somewhat two pronged: Tax Loss Harvest + we are excited about the reallocation (more to come). 

Source: JPM. As of 09/30/22

In addition to the decrease in international holdings/ tax loss harvest, we will tilt the portfolio holding to a more dividend-oriented holding. More on the logic behind the decision listed below.

Add a Dividend Growth ETF (TDVG) to Replace Equal Weight S&P 500 (RSP)

We added RSP to the models back in August 2020 as we expected cyclical reopening of the economy following Covid. This turned out to be a longer-term position than we originally intended as the backdrop for the exposure continue to fit our allocations…we’re finally ready to let it go after a strong showing. 

Source: Bloomberg. As of 10/31/22

With rising rates likely to continue to tighten financial conditions and slow economic growth, we believe it’s time to move up in quality and incorporate both a selection (quality) + dividend focus on a piece of our large cap equity allocation. 

TDVG employ fundamental research and active, bottom-up stock selection to construct a portfolio of high-quality, largely U.S.-based companies (approximately 100-125 issues) that they believe can grow their dividends over time. The investment process focuses on identifying companies trading at attractive valuations with strong competitive advantages and durable business models that will allow for the compounding of earnings and dividends over time, utilizing a tax efficient ETF wrapper. 

Source: T Rowe Price. As of 10/31/22

Source: Strategas, as of 09/30/22

While the expense ratio is slightly higher than RSP (50bps vs 20bps), we believe the minimal uptick in cost is justified given the improvement in exposure and general environment for active management. We think the fund complements our Yield + Growth framework and can add value to the overall allocation. 

Did Somebody Say Small Caps?? 

We are slightly bumping our small cap exposure to replace the international/ EM cut. While we cut exposure with lower valuations (ex US are cheap but this is probably valid considering the overhangs we cited above), we are adding exposure with low valuations PLUS quality as a replacement. 

Domestic Opportunity: Most Small Caps are U.S. based with highly regionalized revenue streams, which helps to hedge global macro and currency uncertainty.

Historical Outperformance: Small Caps historically start fast after recessions, outperforming their Large-Cap counterparts by 32% in the 3 years following the Great Financial Crisis.

Not Afraid of Rate Hikes: Small Caps in general tend to outperform the market in rising rate environments, beating Large-Caps by an average of 1.2% during rising rate environments between 1978-2021.  We haven’t seen that outperformance so far this cycle, which is partly why valuations look so attractive.

On the positive side, small caps have cheap valuations and lower currency risk (owing to more Small Cap business being done exclusively within US Borders).

On the negative side, small caps historically have elevated earnings risk amidst economically challenging periods and high cyclical concentration during a period of slowing growth; though this market cycle has seen resiliency in small cap earnings relative to large cap. We feel our exposure offers enhanced protection to these risks versus cheap beta. 

Small cap valuation trades at 11.5x forward P/E and a four-turn discount to large caps. Valuation is without a doubt the most attractive feature of small caps. However attractive this may be currently, that doesn’t necessarily mean that they can’t get “cheaper”, which would mean more pain. We do think valuation will likely fare better on a relative basis to the S&P 500.  

Source: Strategas 10/19/22

Source: Morgan Stanley, Data as of 10/23/2022

Add a sliver of exposure to an Energy ETF (VDE):

We’re adding old-line energy (read: oil & gas) exposure to the growth and aggressive growth allocations. Due to years of underinvestment both globally and domestically, the world finds itself structurally undersupplied hydrocarbons while the outlook for renewables transition continues to move further into the future than once thought. While prices can be erratic in the near-term, we believe fundamentals for sustained above mid-cycle oil & gas pricing are present, providing strong returns to players across the sector. Moreover, the sentiment around free cash flow management has seen a drastic shift away from growth at all costs to shareholder return via dividends and share buybacks. Limiting the allocation to our most aggressive models is a respectful nod to the volatility inherent of the sector and expected short-term fluctuations. Why VDE? There are not many low-cost, oil & gas-related ETF’s available – VDE gives us this exposure while including many attractively valued small-cap companies excluded from the S&P 500 sector fund, XLE.

Honorable Mentions:

• We cut the 1% Gold exposure from the Preservation Model 🡪 we believe we get enough exposure to metals via INFL as well as the general asset allocation limiting traditional fixed exposure. 

• We cut the 1% OBTC from the Aggressive Growth model 🡪 we will rely on the tech companies inside the QQQ exposure in lieu (we like actual earnings)… also a tax loss harvest. 

• You’ll notice we added one additional traditional bond holding to the Preserve allocation at 5%. We think short term Treasuries given the bump in yield offer a solid return with very little interest rate risk. We used the lowest cost exposure we could find in VGSH to achieve the exposure.

To Conclude

We are excited at the opportunity to make several structural and tactical changes across the portfolios as we approach year end. With the launch of JUCY, we are thrilled to enhance the yield profile of conservative allocations taking advantage of higher market yields and higher market volatility (which equates to more income from the options overlay). In addition, we see value in the tilt towards higher quality/ dividend paying companies which should outperform in an environment where the “G” (growth rate) is more uncertain 🡪 this pertains to TDVG, OSCV and the international changes (combination of better exposure + tax loss harvesting). Lastly, we are excited to add some direct energy exposure for our more growthy allocations where we see the structural backdrop on energy as providing a strong catalyst to the sector for the foreseeable future. 

Disclosures

Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The information contained herein should not be considered a recommendation to purchase or sell any particular security. Forward looking statements cannot be guaranteed.

This commentary offers generalized research, not personalized investment advice. It is for informational purposes only and does not constitute a complete description of our investment services or performance. Nothing in this commentary should be interpreted to state or imply that past results are an indication of future investment returns. All investments involve risk and unless otherwise stated, are not guaranteed. Be sure to consult with an investment & tax professional before implementing any investment strategy. Investing involves risk. Principal loss is possible.

When a page is marked “Advisor Use Only” or “For Institutional Use”, the content is only intended for financial advisors, consultants, or existing and prospective institutional investors of Aptus. These materials have not been written or approved for a retail audience or use in mind and should not be distributed to retail investors.  Any distribution to retail investors by a registered investment adviser may violate the new Marketing Rule under the Investment Advisers Act.  If you choose to utilize or cite material we recommend the citation, be presented in context, with similar footnotes in the material and appropriate sourcing to Aptus and/or any other author or source references. This is notwithstanding any considerations or customizations with regards to your operations, based on your own compliance process, and compliance review with the marketing rule effective November 4, 2022.

The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 11.2 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 4.6 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization. 

The S&P SmallCap 600® seeks to measure the small-cap segment of the U.S. equity market. 

The MSCI USA Index is designed to measure the performance of the large and mid cap segments of the US market. With 627 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in the US.  

The MSCI EAFE Index is an equity index which captures large and mid-cap representation across 21 Developed Markets countries around the world, excluding the US and Canada. With 800 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. 

The Russell 2000® Index measures the performance of the small-cap segment of the US equity universe. The Russell 2000® Index is a subset of the Russell 3000® Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership. The Russell 2000® is constructed to provide a comprehensive and unbiased small-cap barometer and is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true small-cap opportunity set. 

Advisory services are offered through Aptus Capital Advisors, LLC, a Registered Investment Adviser registered with the Securities and Exchange Commission. Registration does not imply a certain level or skill or training. More information about the advisor, its investment strategies and objectives, is included in the firm’s Form ADV Part 2, which can be obtained, at no charge, by calling (251) 517-7198. Aptus Capital Advisors, LLC is headquartered in Fairhope, Alabama. ACA-2211-2.

The post Rebalance Rationale, November 2022 appeared first on Aptus Capital Advisors.

A real feel for the effectiveness, and timing of that effectiveness, requires an understanding of both delta and notional.

Why The Focus on Options Recently?

Our focus on the basics of options recently is driven by the world we live in. We are entering a period of decision making by the Fed that could materially alter the way markets are priced, and Fed decisions are just one item on a long list where each item is a potential catalyst of volatility.

In other words, we think there will be a heightened desire for hedges. Hedges can be viewed as a form of insurance premiums paid, in deploying options to reduce and manage risk.

Our focus is paying the smallest premium possible for the largest payoff. As with any insurance, sometimes it never pays off, and that’s not a bad thing – that typically means the sun has been shining and things are good. 2021 was a perfect example of that environment.

We pay premiums for potential protection, not because we fear the future, but because of the freedom it provides. We can seek out greater returns in growth assets knowing we have protection in place.

The Aptus portfolio construction philosophy is the definition of the strong engine/strong brake analogy that we’ve been using (credit to David Dredge of Convex Strategies). Stocks are a stronger engine relative to bonds, in our opinion.

We do not see value in the traditional approach of risk management through bonds, and won’t handcuff our portfolios with allocations to negative expected returns via bonds. We want a stronger engine (more stocks) equipped with better brakes (our hedges). Competitive in a straightaway, quick in and out of the turns…that’s how you win the long-term race of compounding capital.

With all that said, our ability to add value to you and your clients is a combination of our portfolios and effective communication. We need to message clearly and these last couple of notes are (hopefully) aiding our ability to do that. A shared understanding of our hedges can only help towards in end goal of generating sufficient returns that can be digested by your clients.

Notional Value 

We throw phrases like this around often:

“Currently, we have 100% of the notional value of a strategy protected.”

Here’s what that means:

Notional value refers to the amount of value an option controls. For example, let’s assume stock ABC is trading for $100 and we own 1000 shares, which would mean we owned $100,000 of ABC.

With each option carrying a multiplier of 100 shares, buying 10 put contracts gives us the right to sell 1000 shares. If those puts carry a 90 strike price (right to sell at $90), we have 90% notional protection. It’s that simple – the notional protection amount is simply the number of contracts we have multiplied by the strike price.

Blend of Delta and Notional 

The notional value tells you one thing, but it’s the blend of notional and the deltas of the options that give you a greater understanding of what to expect from your hedges.

Let’s assume the same information but let’s add the delta of the put options we bought is currently 40. Technically it’s negative 40 but we are keeping this as simple as possible.

As a refresher, two things to keep in mind:

1. Deltas are dynamic, so that 40 delta option will not remain a 40 delta as our stock position moves
2. Delta tells us how much the option moves relative to the underlying. So, for a 1 dollar move in our stock, this put option should move 40 cents.

Now we are getting to the things that matter…

As a holder of the combination of this stock and your put protection, here’s what you can expect to feel of an immediate move lower:

Your notional protection covers 90% and the delta of the option is currently 40. You simply multiply your % Notional by the Delta to get 36% as the amount you’d protect.

Let’s say you had a 5% drop in the stock. Right now, you’d feel 64% of that drop while protecting 36% of your position from it. Remember, as the stocks continues to drop your puts will be realizing more and more delta as their deltas increase closer and closer to one. The effectiveness (and size) of the hedges will grow if your position keeps falling.

Hopefully, you can see clearly how the notional value and deltas dictate the effectiveness, but also how the effectiveness is dynamic. 

Our Portfolios 

Our portfolios are holding elevated notional protection now. With the market’s recent rise, our deltas are not as elevated as they once were.

We continue to like our positioning at the allocation level (more stocks and less bonds), as well as the positioning of our hedges. We believe Q2 could get interesting and have no issue holding higher notional protection.

As always, please don’t hesitate to reach out and thank you for your trust.

Disclosures

Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The information contained herein should not be considered a recommendation to purchase or sell any particular security. Forward-looking statements cannot be guaranteed. 

This commentary offers generalized research, not personalized investment advice. It is for informational purposes only and does not constitute a complete description of our investment services or performance. Nothing in this commentary should be interpreted to state or imply that past results are an indication of future investment returns. All investments involve risk and unless otherwise stated, are not guaranteed. Be sure to consult with an investment & tax professional before implementing any investment strategy. Investing involves risk. Principal loss is possible. 

Advisory services are offered through Aptus Capital Advisors, LLC, a Registered Investment Adviser registered with the Securities and Exchange Commission. Registration does not imply a certain level or skill or training. More information about the advisor, its investment strategies and objectives, is included in the firm’s Form ADV Part 2, which can be obtained, at no charge, by calling (251) 517-7198. Aptus Capital Advisors, LLC is headquartered in Fairhope, Alabama. ACA-2204-4. 

The post What is “Notional Protection”? appeared first on Aptus Capital Advisors.