Many institutional allocators, investment advisors, and high-net-worth investors are looking for strategies that adapt to changing market conditions more effectively than traditional static buy-and-hold portfolios.
Investment advisors and asset allocators often hear the same headlines and read the same reports on Federal Reserve decisions, inflation, GDP, and corporate earnings. Many market participants treat these as primary drivers of portfolio decisions. McElhenny Sheffield takes a different view.
In this Q&A, we contrast the indicators that often dominate Wall Street analysis and many investment firms with the market-based signals we prioritize. We also explain why a disciplined, rules-based process can help allocators and advisors respond to changing markets with greater objectivity.
What Many Analysts and Investors Treat as Critical
Wall Street analysts and investment managers often focus on macroeconomic events and data that provide useful economic context. For McElhenny Sheffield, however, this steady stream of news and information functions more as noise than as a reliable signal to portfolio allocation.
1. What do most analysts treat as the most important inputs for investment decisions?
What Wall Street may think. Many analysts and investment managers closely follow Federal Reserve interest-rate decisions, inflation data, GDP growth, employment reports, and corporate earnings. These items supply economic context and can move markets when they differ from consensus expectations.
Why we think differently. Rather than trying to forecast how a given data point or points may move markets or stocks, McElhenny Sheffield’s process is built around observing what markets are actually doing. In our view, price and trend behavior reflect the net effect of all available information more reliably than any single economic report, forecast, or headline.
2. Why do many investors focus on Federal Reserve rate decisions?
What Wall Street may think. Interest rate decisions made by the Federal Reserve may influence borrowing costs, bond yields, discount rates, and broader financial conditions. Investors often parse policy statements, projections, and analyst calls for clues about the where and when to invest.
Why we think differently. While interest-rate decisions matter as context, they may not reliably dictate sustained market direction on their own. We give greater weight to observed price behavior and trend persistence across markets.
3. Isn’t inflation data critical because it affects purchasing power, company margins, and valuations?
What Wall Street may think. Yes, higher-than-expected inflation may raise investor concern that the Fed will need to raise interest rates or keep them higher for a longer amount of time. That expectation can hurt both stocks and bonds at the same time.
Why we think differently. We think that inflation data may be important evidence for some market and sector directions, but it’s only part of the story. We prioritize what markets are doing through trend and momentum analysis rather than trying to guess about future inflation or reacting to inflation data.
4. Don’t GDP and jobs reports tell us whether the economy and markets are healthy?
What Wall Street may think. Gross Domestic Product (GDP) estimates the economy’s total output and helps shape expectations for growth, inflation, and policy. Employment data may tell us about household and business health, payrolls, and demand activity. Generally, strong GDP and low unemployment is seen as bullish for stocks.
Why we think differently. GDP and jobs reports can shape short-term market expectations, but they often lag market price movements and may be revised after their initial release, sometimes substantially. By contrast, we focus on whether markets themselves are showing persistent market momentum or trend weakness. The stock market is a leading indicator of the economy, not the other way around.
5. Why not emphasize individual company earnings, balance sheets, and management quality?
What Wall Street may think. Traditional fundamental analysis starts with the company: earnings power, competitive advantages, valuation, and balance-sheet strength, among others. Many managers build portfolios stock by stock around these factors.
Why we think differently. Stock picking based on fundamental analysis is notoriously difficult, and the vast majority of managers fail to outperform their benchmarks over time. Our process focuses instead on overall market and sector behavior rather than individual-company research. Company fundamentals matter in the broader market, but they are not the primary drivers of our allocation decisions. We find it is more important to decide when to be invested in the stock market and when to be defensive to protect capital.
6. What is wrong with a traditional static 60/40 portfolio?
What Wall Street may think. A 60/40 allocation of 60 percent stocks and 40 percent bonds has long served as a reference point for conventional investing strategies. The reason is that stocks have historically provided growth potential while bonds have sought to supply income and diversification. This simplicity has appealed to many investors and advisors.
Why we think differently. A traditional 60/40 portfolio generally assumes that stocks and bonds will not move in lockstep. When stocks decline, bonds have often helped offset some of the loss. But that relationship is not constant. During periods of rising inflation or sharply higher interest rates, stocks and bonds can both decline at the same time, reducing the diversification benefit investors expect from a fixed allocation. The simultaneous stock-and-bond decline in 2022 illustrates this risk.
We prefer a rules-based process that can adjust equity allocations as the market changes. This approach cannot eliminate losses or guarantee positive returns, but it is designed to respond to changing market conditions rather than assume that stock-bond diversification will always provide protection.
What McElhenny Sheffield Emphasizes
We emphasize tactical allocation driven by trend-following, momentum, and relative-strength measures. These tools assess whether markets have shown persistent strength or weakness. Our process is designed to respond to the cumulative weight of the evidence rather than any single opinion or forecast.
7. How does tactical investing work?
What Wall Street may think. Some tactical managers blend quantitative signals with discretionary economic views or portfolio manager judgment.
Why we think differently. McElhenny Sheffield strategies are completely rules-based, not driven by subjectiveness, guesses about the future, or manager opinions. As a tactical manager, we have no mandate to remain invested in the stock market at all times; we may be fully invested in equities when signals are favorable, partially invested as conditions deteriorate, or significantly reduce equity allocations, including to zero, when signals indicate a more defensive posture.
We are not committed to any particular stock, sector, or asset class. We follow predefined signals and risk-management disciplines intended to respond to changing market conditions and to seek to limit material losses.
8. How do traditional investment managers typically evaluate opportunities?
What Wall Street may think. A macro-oriented manager often begins with an economic view, “Will inflation fall, the Fed cut rates, and growth stocks outperform?” A fundamental analyst may start with the company, “Will this firm’s earnings and valuation make the stock attractive?”
Why we think differently. We ask a different question: Which sectors and asset classes are demonstrating sustained leadership, and when do the data indicate that risk should be reduced? We do not need to forecast the next CPI release, Fed move, or GDP number correctly, or at all. We aim to respond after markets establish a meaningful trend.
9. How can sector rotation help a portfolio adapt to changing market leadership?
What Wall Street may think. For many firms, a sector allocation strategy seeks to allocate toward sectors and industries that meet a predefined criteria. Many investors may form their views through economic forecasts, company fundamentals, business cycle expectations, or just news coverage that highlights certain sectors.
Why we think differently. Rather than attempting to predict which sector may be the next leader, McElhenny Sheffield looks for evidence of leadership. Our process evaluates relative strength and momentum across sectors, then applies predefined selection, buy, hold, sell, and risk-management disciplines.
Our objective is not to own a sector because it appears attractive in theory or because a forecast calls for a particular economic outcome. Instead, we look to participate in areas that have and may continue to demonstrate sustained relative strength while reducing or rotating allocations when the strategy’s signals weaken. Sector rotation cannot, of course, guarantee returns or prevent losses.
10. Why does McElhenny Sheffield use ETFs rather than individual stocks?
What Wall Street may think. Traditional approaches often build portfolios from individual securities selected for superior historical or potential earnings, or valuations.Why we think differently. ETFs provide us an efficient way to implement allocation decisions efficiently through a single traded vehicle. ETFs may help streamline execution, enhance diversification, and reduce taxable distributions.
11. In what scenarios may tactical investing fit for advisors and allocators?
What Wall Street may think. Some allocators and investors may view tactical strategies as attempts to time the markets or as replacements for a core portfolio.
Why we think differently. We believe that avoiding material losses is foundational to long-term investing. McElhenny Sheffield strategies are designed as a tactical satellite focused on capital preservation in down markets and participation in up markets, with an aim to enhance overall portfolio diversification and improve investor results.
The Weight of the Evidence
Many investment decision-makers rely on one dominant view, such as earnings, valuations, or macroeconomic outlook.
McElhenny Sheffield takes another perspective. Our “weight of the evidence” strategy means we do not rely on any single signal. We combine multiple trend and momentum indicators to determine allocation decisions.
The question is not “What do we predict will happen?” but “What is the cumulative body of price and momentum data telling us right now?” This approach aims to reduce behavioral bias and the influence of conviction or emotion.
About McElhenny Sheffield
McElhenny Sheffield believes that avoiding material losses is the foundation of successful long-term investing. Risk management and capital preservation are the firm’s top priorities.
The firm is committed to protecting investors’ financial futures through a rules-based, tested, momentum-driven, trend-following tactical ETF strategy. The strategy is positioned as a tactical satellite portfolio for advisors who need to protect their clients’ core portfolio while still seeking growth.
Clients include independent-thinking investment advisors across the U.S., large investment allocators, and high-net-worth individuals and families looking for a second opinion. McElhenny Sheffield also provides sub-advisory services for RIAs and financial advisors. The firm was founded in Dallas, TX, in 2000, and manages more than $798 million in assets as of June 30, 2026.
Disclosure
The information contained in this article has been obtained from sources believed to be reliable; however, its accuracy, completeness, and timeliness cannot be guaranteed. Any opinions or estimates reflect the author’s judgment as of the date of publication and are subject to change without notice. This material is provided for informational purposes only and should not be construed as legal, tax, or investment advice. Investors should consult their tax advisor or legal counsel for advice and information concerning their particular situation. See other important disclosures below.