The risk of creating portfolios with asset classes is that there is hidden correlation. For example, Shiller in this lecture, around the 55 minute mark in explaining the virtues of efficient portfolios, claims that having stocks, bonds and oil in your portfolio in some combination is a good thing, since it reduces correlation.
Well, to carry that point of efficient E-V further, you end up wanting to dis-articulate stocks into factors, since some stocks are more heavily oil sensitive than others, some stocks, with stable and predicable dividends, are more like bonds than others. Just leaving the object set of the portfolio at assets leaves some hidden correlation off the table.
In a sense, then, factor models are ways of taking x-rays of a security to see how correlated they are to fundamental economic elements (oil, carry, momentum, etc.)
In the limit, I think a good model needs also an element on the cyclicity of factors. The most stable, that is, acyclic, factors are already found and have reasonable stories which persist through business cycles. But this doesn't mean the rest of the factor zoo is for the dump. If they can be attached to a meaningful theory of the business or credit cycle, then a factors carousel can be created. Not all correlations are linear and constant. Some can by cyclic, so perhaps linear regression isn't the ideal form for producing and measuring these correlations.
But getting a nowcast or forecast of economic conditions is not easy, nor do I think it properly interacts with factor models.
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