Pave's Ability to Adapt

For Financial Professional Use Only

As it stands, there are two layers of uncertainty in the economy:

• What will the final form of the tariffs look like?
• How will consumers and businesses react to those tariffs?

These layers are causing companies to pause their capital expansion and hiring plans. This new investment terrain also creates a high wall of uncertainty for investors, causing them to be more cautious. Instead of a reliable series of outcomes, either good or bad, we are left with two scenarios:

• Permanent tariffs are set, and historical economic and political ties with our trading partners are severely damaged.
• We move toward a number of tariff-free zones, and the tariff overhang brings major concessions among the world’s major trading partners.

For now, there is not much middle ground, which means that investors can violently swing prices to extremes, based on which of these two scenarios seems more likely at any given time.

To avoid having to flip a coin and weather these swings, it may be best to get defensive and wait for a more stable environment from which to make longer-term investment decisions. This can be done a few ways with Pave’s factor tilt functionality, which aligns your portfolio with the scenario you think will most likely play out.

Let’s say you prefer to be positioned for the worst case of permanent tariffs, where capital flows continue to leave the U.S., you can set a Factor Tilt to the U.S. Dollar. This will position your portfolio with stocks that are sensitive to changes in the value of the dollar. If capital continues to flow out of U.S. bonds and stocks, the dollar will continue to fall, and Pave will direct the portfolio to take advantage of that. If events unfold to look more like the second scenario, the dollar will rise sharply, and a different set of stocks that are sensitive to a strong dollar will be suggested.

To create an even more defensive portfolio, you could also choose to benchmark to the S&P Yield Index with the MinVol Factor Tilt. This selection will create a portfolio that will track your desired benchmark but will emphasize component stocks that exhibit lower volatility.

However, if the two-scenario world seems to be materializing toward an optimistic view, then you may prefer to look through the current market anxiety and not adopt a more defensive stance.

Regarding that second, more optimistic, scenario, there is a technical indicator with the same acronym as the college fraternity ZBT. It is called the Zweig Breadth Thrust, and it has only flashed a buy signal 8 times since the March 2009 Global Financial crisis low. It triggered on Thursday, and there has never been a period since 1950 when the ensuing 6-month or 12-month return was negative.

With that in mind, if you have clients who sense an opportunity now, you can position them with a higher volatility setting while still tracking their preferred benchmark.

To learn more, please reach out by emailing sales@pavefinance.com or pressing the button below. We look forward to speaking with you.

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For Financial Professional Use Only

1. Testimonial provided by Dre Griggs in August of 2023. Dre is not a current client of Pave Finance, Inc. (“Pave”) or any of Pave’s affiliated entities. Dre is an Independent investment adviser with $300 million in AUM.  No compensation was provided in exchange for this testimonial.

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