Is It Time to Position Portfolios for a Recession?

Stock futures in the U.S. were trading down on all the major indexes on Tuesday morning while Brent crude futures fell to $102.34 a barrel, down 4.4%. Commodities have experienced losses recently on expectations that the economic slowdown will lead to a reduction in demand. Bond yields were down as well, with the 10-year Treasury falling from 2.990% to 2.924% as part of a larger downward movement based on expectations of a slowing economy and the Fed relaxing interest rates in 2023.

All are signals and reflections of investor concerns about a slowing economy that could be driven into recession as the Fed fights to tame inflation at all costs.

“There is going to be a recession, but we’re not there yet,” Philip Saunders, co-head of multiasset growth at Ninety-One, told the WSJ. “The key thing that is going on is that financial liquidity is retracting.”

Alongside June’s CPI report this week, earnings season is kicking off and close attention is going to be paid to the language that banks are using around their forecasts for the economy in the second half of the year. Earnings could be somewhat muted by the impacts of the strengthening U.S. dollar as well as the broader inflationary price increases and their effect on profit margins. On Monday the dollar was up 1.1%, the highest it has been since 2022, before stalling today.

Increasing interest rates are driving advisors and investors to consider alternative sources of income as bond allocations continue to experience outflows. One place that advisors are turning to seek income is within dividends and dividend-yielding companies.

The KFA Value Line Dynamic Core Equity Index ETF (KVLE C+) follows a strategy of investing in higher-yield companies while diversifying in a way that a “theme” portfolio does not. The fund is a core equity portfolio of securities that are tilted to favor dividend yield, and it seeks to increase yield while avoiding investing solely in high-yield sectors and stocks.

KVLE is benchmarked to the 3D/L Value Line Dynamic Core Equity Index and utilizes optimization technology to emphasize securities with solid dividend yields that have the highest rankings in both Value Line Safety and Timeliness. The fund uses a smart beta strategy in seeking more cost-efficient alpha as well as a risk-management strategy that seeks to limit the effects of major market declines while also being positioned to capture positive returns.

KVLE carries an expense ratio of 0.55%.

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