[We are in a puzzling investment environment. Warning signs abound. Uncertainty and fears of recession have investors and advisors climbing that wall of worry as markets continue to reach new highs. It keeps begging the question: How do you navigate an environment such as this?

The Institute was recently introduced to Rob Stein, founder and CEO, and John Eckstein, CIO, of Astor Investment Management—a Chicago-based registered investment advisor that keeps a rather unique finger on the pulse of the economy and the ETF landscape. Rob Stein, with his experience at the Federal Reserve and senior positions at large money center banks has developed a tool—the Astor Economic Index (AEI)—to “now cast” versus predict the economy. Through a robust proprietary data-driven macroeconomic approach, their research and investment knowledge can greatly add to the industry discussion on this navigation question and help advisors on defending their clients’ portfolios.]

Hortz: Why are economic data and a macro approach the core of your investment philosophy?  

Stein: Our research over many decades has proven—and continues to prove—that increasing exposure to risk-bearing assets, like equities, during positive economic environments (expansions) and decreasing exposure during negative environments (contractions) have the potential to be extremely productive for portfolio construction and management. Through our economics-based, fundamentally driven approach, Astor has amassed a successful track record. Most importantly—and as happened in late 2007 before the financial crisis hit—by being data driven, we were able to avoid steep losses and help clients mitigate the impact of wealth destruction in their portfolios. As a result, they were better positioned for growing their portfolios as opportunities to invest emerged.

Hortz: How do you cut through misinformation or confusing economic periods where definitive trends or direction are not determinable?

Eckstein: The problem isn’t with the data—it’s what some people try to do with it. Namely, the problem is in prediction. The problem with forecasting is that it’s very easy to get wrong. It’s like the old joke that economists were created to make weather forecasters look good. We have stayed true to our analytical roots. Rather than trying to predict what is going to happen, we find it much more impactful to review and analyze economic data in real time to determine what is currently happening. To do this, we look at the economic data in aggregate to determine the current strength or weakness of the economy and manage our portfolios accordingly.

Hortz: Tell us about your proprietary Astor Economic Index—what it comprises and how you use it?

Stein: The Astor Economic Index or AEI provides us with a real-time “window” to the economy. The AEI aggregates data from across the U.S. economy as a systematic analysis of various employment and output data (GDP, ISM, etc.) to say where the economy is today. By aggregating all economic data into a single value, we can then compare today’s economy reading to historical averages and absolute historical levels to determine the relative strength or weakness of the economy, in real time. The AEI allows us to keep our finger on the pulse of the economy and to manage our portfolios accordingly.

Hortz: How did you go about constructing your index and how do you continue to develop it?

Stein: The concept/idea of the Astor Economic Index was really born during my time served as a project analyst at the Federal Reserve and my time spent on trading desks at large Wall Street money center banks. Economic data was generally released in the mornings and fed open market operations were conducted every day, if needed, in the mid-morning.  Once a week on Thursday afternoons, the traders would wait around for the latest money supply data. I noticed markets would make short term moves that the traders welcomed but it was not consistent with the movements over the next few weeks or months.  I started to keep track of the data every day in a note book with graph paper. Eventually I used a computer and a program called Lotus 123.  The one thing I noticed was the short term moves were not always consistent with the direction of the data. Sometimes good data produced negative results in the markets and vice versa. I found that extremely interesting and it led me down the path of analyzing longer term trends in the data and not any individual data point.  It eventually became clear that data consistent with why an economy grows, such as employment data and what an economy produces, its output like GDP, were more predictive of the longer term direction. This was the Eureka moment that began my research into identifying the trend in economic data that supported trends in markets and not trying to identify short term moves.

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