Global Balanced portfolio outlook, positioning, and attribution as of 12/31/2023
December 31, 2023
- We see late-cycle conditions globally and a potential fork in the road for the U.S. economy in 2024: factors that have supported growth in recent quarters fading and we see more challenges for the U.S. consumer ahead, which raises the risk of recession, but we also see a realistic path toward a “soft landing” that could further extend the cycle.
- Temporary post-COVID factors that have helped sustain economic growth are fading, including record demand for labor, rebounding labor market participation, and above-trend consumer savings and wage growth.
- A shift to less restrictive U.S. monetary policy could help limit the negative impacts of the Fed’s sharp rate-hiking cycle, but we believe it is very unlikely to kick off a new period of rapid economic expansion.
- Absent an unexpected reacceleration of inflation, we also see potential for a continued pullback in Treasury yields in 2024, though interest rates should remain a headwind to growth, and credit spreads could widen.
- Internationally, Europe is facing a pullback in household consumption and investment, along with higher inflation risks and less of a savings cushion than the U.S., and China’s growth remains anemic due to negative wealth effects and deleveraging, but Japan is a relative bright spot, as its inflation recedes while stimulative monetary policy remains in place.
- In our view, this evolving economic environment warrants a balance of exposures to defensive areas of the market as well as areas that should benefit if economic growth persists.
- In the U.S., we are avoiding early-phase, cyclical sectors and emphasizing both mid- and late-phase sectors with secular earnings drivers and that we expect will see less deceleration in earnings as economic growth slows, such as Communication Services and Health Care.
- We remain underweight to international equities, as a whole, including Europe and emerging markets, but we maintain an overweight of developed Asia, where we see the greatest potential for economic resilience abroad.
- We maintain an overweight of fixed income with an emphasis on intermediate and longer-term Treasury securities that we believe should benefit from declining interest rates, and we have continued to reduce corporate exposure, where current credit spreads offer limited compensation for risk.
- Long-Term Bonds
- U.S. Energy Equities
- Short-Term Fixed Income Securities
- U.S. Health Care Equities
- U.S. Consumer Staples Equities
- U.S. Financials Equities