The Vestmo Market Barometer, Explained

The barometer’s reading establishes one of four risk levels that can be used for asset allocation.

Key Points

• The Vestmo Market Barometer is a rules-based framework providing tactical signals for capital growth and preservation.
• The barometer assigns one of four risk levels, dictating asset allocations ranging from 20% to 80% in stocks.
• Seven factors, including capital structure and price behavior, are used by Vestmo to generate its barometer score.

Each edition of Barron’s Investor Circle includes quantitative insights from Vestmo.

The Vestmo Market Barometer is a “rules-based framework that delivers a tactical signal aimed at enhancing capital growth in favorable markets and preserving capital in adverse conditions.” The barometer’s reading establishes one of four risk levels that can be used for asset allocation:

• Cautious: A 20% allocation to stocks and 80% allocation to bonds
• Mildly cautious: A 40% allocation to stocks and 60% allocation to bonds
• Balanced: A 60% allocation to stocks and 40% allocation to bonds
• Risk-on: A 80% allocation to stocks and 20% allocation to bonds

Vestmo uses seven factors to produce its barometer score:

1. Capital Structure: Large-cap stocks, measured by the versus investment-grade corporate bonds, measured by the . Conditions favor equities (1) in risk-on markets and corporate bonds (0) in risk-off settings.

2. Credit Market Quality: High-yield bonds (iShares iBoxx $ High Yield Corporate Bond ETF) versus investment-grade corporate bonds (). Conditions favor high-yield bonds (1) in risk-on markets and investment-grade bonds in risk-off settings.

3. Balance Sheet Leverage: Financials () versus utilities (). Conditions favor financials equities (1) in risk-on markets and utilities equities in risk-off settings

4. Variability of Earnings: Industrials () versus consumer staples (). Conditions favor industrials equities (1) in risk-on markets and staples equities in risk-off settings

5. Earnings Duration: Growth () versus value (). Conditions favor growth equities (1) in risk-on markets and value equities in risk-off settings

6. Price Behavior: Momentum (iShares Edge MSCI USA Momentum Factor ETF) versus beta neutral (AGF U.S. Market Neutral Anti-Beta Fund). Conditions favor momentum equities (1) in risk-on markets and market neutral equities in risk-off settings

7. Price Sensitivity: High beta (Invesco S&P 500 High Beta ETF) versus low volatility (Invesco S&P 500 Low Volatility ETF). Conditions favor high beta equities (1) in risk-on markets and low volatility equities in risk-off settings.