As a dedicated investment advisor at D&A, my primary focus is to ensure that our strategic and tactical positioning remains sound for our client portfolios. This requires extensive research and analysis of current market conditions. Over the past several quarters, our strategy has included overweighting equities, enhancing the quality of our equity positions, and maintaining a shorter duration in fixed income relative to core benchmarks. However, the dynamic nature of the markets necessitates continuous evaluation to determine if adjustments are needed.
Recently, I took part in a Northern Trust webinar titled "What’s the Market Missing?" which provided valuable data and insights influencing my current views. Here are some key takeaways:
Real Wage Growth and Consumer Spending:
Real wage growth in the U.S. is on the rise, likely supporting consumer spending going forward. However, high interest rates have increased the interest burden, especially for lower-income groups. This mixed impact on disposable income warrants close monitoring.
Inflation and Interest Rates:
Inflation remains a challenge for the U.S. economy, though it has been steadily declining. Notably, "core services ex-housing" inflation is on an uptick, attracting the Fed's attention. With U.S. equity valuations elevated but within normalized bands, the "higher for longer" interest rate scenario could be a key determinant of future market moves.
Volatility:
Volatility has been unusually low, with recent averages well below the historical norm of 20%. Historically, volatility spikes can lead to asymmetric returns—markets tend to be more volatile on the downside than on the upside. Factors like value and momentum, which prefer volatility, have shown mixed performance. Since 2022, momentum has been the best-performing factor. We should be cautious, as volatility is unlikely to remain at these depressed levels for long.
Current Tactical Views and Recommendations
Currently, we maintain an overweight position in stocks over bonds. The U.S. growth picture remains robust and is broadening globally, with parts of Emerging Markets showing promise. Central bankers expect inflation to decline gradually, with no signs of widespread acceleration. We continue to favor the momentum and other factors and are sticking with small- and mid-cap as market breadth has started to gain traction.
In the fixed income space, we continue our shorter duration bogey and underweight in investment grade bonds and overweight in high-yield bonds, aligning with the strong growth outlook. This positioning also hedges against the risk of being wrong about the inflation trajectory, especially given the negative correlation between stocks and bonds observed in Q1.
Conclusion
Our investment philosophy hinges on thorough market analysis and strategic adjustments based on emerging data. The insights from the Northern Trust webinar reinforce our current positioning but also highlight areas for vigilance, such as volatility and inflation dynamics. By staying informed and adaptable, we aim to continue delivering strong, risk-adjusted returns for our clients.