Our Cash Indicator methodology acts as a plan in case of an emergency. This is analogous to the multiple safety systems in a modern automobile, which includes an airbag. Importantly, each of these systems work together to potentially help smooth the ride.
We manage risk within our strategic, long-term allocations based on diversification across equity, fixed income, and alternative assets and a focus on more attractive relative values.
We manage risk tactically over the short-term by investing across a broad array of themes and asset classes including cash. We can either invest opportunistically or defensively depending on the environment.
Cash Indicator: Markets are beginning to look complacent.
Our proprietary Cash Indicator (CI) provides insight into the health of the market by monitoring the level of fear using equity and fixed income indicators. This warning system is designed to signal us to either a 25% or 50% cash position to potentially protect principle and provide liquidity to reinvest at lower and more attractive valuations.
Though the CI has retreated from its April levels, it remains above the complacent levels seen late last year. As a result, we think that while the markets reflect some complacency, they are pricing in a more appropriate level of risk.
Strategic View
Economic growth can support higher equity prices while high quality fixed income appears attractive.
Equity Valuations: The capitalization weighted S&P 500 Index again appears to be somewhat expensive. However, we are finding many attractive valuations in quality businesses outside of the high-fliers.
Equity Favorability: We expect the U.S., propelled by innovation and relatively strong fundamentals, to lead global equity markets. Our focus remains on companies with consistent earnings due to continuing economic risks.
Fixed Income Valuations: At current interest rates, high quality fixed income looks very attractive while high yield is less attractive on a risk-reward basis.
Fixed Income Favorability: Our allocations are positioned to generate attractive current yield while protecting against large interest rate moves and the risk of credit deterioration. We expect the U.S. Federal Reserve to slowly reduce short-term interest rates further later this year. We are finding attractive opportunities to lock in current income levels in the belly of the yield curve through investment grade corporate bonds and asset-backed securities.
Tactical View
We favor a broad array of domestic equity, as well as investment grade intermediate fixed income.
There is more clarity around some tariff levels and negotiations are a step in the right direction. Our work suggests that private sector fundamentals remain strong. A notable indicator of this strength is the consistent rise in real personal income adjusted for inflation and excluding government transfers. This metric has reached successive all-time highs since mid-2024, signaling an increase in the purchasing power and economic engagement of households. We have decreased allocations to cash and rebalanced other holdings while increasing existing allocations to equity investments that we think will benefit more from continued economic growth.
Global Broad Outlook
We expect slow global economic growth to persist despite global trade headwinds.
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