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 functioning properly, but we expect continued volatility.
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.
The CI has elevated off of recent lows but continues to reflect an overly complacent market. History suggests that market volatility is likely to increase at least to historic norms in the months ahead.
Strategic View: Fixed income valuations remain attractive, as do value and dividend-oriented equities.
Equity Valuations: The capitalization weighted indices have rebounded to historically expensive valuations despite solid earnings growth. However, other areas of the global equity market look more attractive, especially the value style and dividends.
Equity Favorability: Recent broader U.S. equity market participation is a healthy sign. We expect this broadening to continue along with U.S. economic growth. We remain overweight U.S. equities relative to foreign, especially favoring the value style and dividend payers.
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: While still taking less interest rate risk than the broader bond market, we have emphasized the intermediate portion of the yield curve through defined maturity ETFs in order to lock in higher interest rates. Our allocations are positioned to generate attractive current yield while protecting against large interest rate moves.
Tactical View: We favor value, quality, and momentum equity, as well as investment grade intermediate fixed
Recent data suggests that the worst of the headwinds for the global economy may have dissipated, which shifts the tactical opportunities set for global equities. Increased global economic growth should lead to more demand for natural resources, such as agricultural goods, energy, and industrial metals. We recently purchased a global natural resources ETF that may benefit from these trends. Meanwhile, we think uncertainty has increased for both short-term and long-term U.S. interest rates. As a result, we adjusted our fixed income allocations to be more focused on intermediate duration by increasing our existing allocations to defined maturity ETFs to reduced short-term interest rates.
Global Broad Outlook: Global economic activity has improved, broadening the opportunity set.
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