Global Conservative portfolio positioning intra-quarter update as of 01/13/2023

With slowing economic growth, we see increased risk to corporate earnings but reduced risk to interest rates. We have increased our fixed income overweight, shifted some corporate bond exposure to Treasury bonds, and added to our overweight of late-phase, defensive U.S. equity sectors.

January 13, 2023

ACTIONS and OVERVIEW:

Modestly increased fixed income overweight; reduced overweight of corporate bonds; added to Treasury exposure

• Added to existing long-term Treasury bond ETF holding
• Trimmed existing intermediate corporate bond ETF holding
• Added to fixed income positions/reduced equity positions proportionally

Increased late-phase U.S. equity sector overweight; reduced mid-phase U.S. equity sector exposure

• Added to existing Consumer Staples ETF holding
• Trimmed existing Information Technology ETF holding

Portfolio rebalance

The rapid evolution of this economic cycle, along with both a deterioration in certain economic readings and the Fed’s aggressive monetary policy stance, point to later-cycle economic conditions in the U.S.  We see slower economic growth, increased risk of recession, and higher potential for disappointing earnings growth, particularly for companies in economically sensitive parts of the market.  At the same time, we believe the combination of deteriorating economic fundamentals and decelerating inflation readings should reduce upward pressure on interest rates in the period ahead and, over time, lead to lower interest rates, particularly for longer maturity Treasury bonds.

UPDATE DETAIL:

Modestly increased fixed income overweight; reduced overweight of corporate bonds; added to Treasury exposure

• Given our outlook, which contemplates continued equity market volatility amid a rising likelihood of recession, we have elected to further increase our fixed income overweight and reduce equity exposure.
• Fixed income markets have discounted a significant portion of monetary policy tightening and, thus, provide a favorable risk/reward profile, in our view, in the current environment.
• We believe that the potential for slower real growth, decelerating inflation and margin pressure could drive further widening of corporate credit spreads, which remain materially below levels typical of recessions.
• At the same time, the long end of the Treasury yield curve has largely priced in the full extent of monetary policy tightening, in our view, while slower economic growth and moderating inflation pressures are likely to limit further interest rate upside at this part of the yield curve.

Increased late-phase U.S. equity sector overweight; reduced mid-phase U.S. equity sector exposure

• Given our outlook for slowing economic growth and a rising risk of recession, we continue to emphasize sectors that have historically demonstrated lower volatility in revenue and earnings than the broader market.
• We believe that U.S. Consumer Staples sector earnings will remain more resilient than the broad market, even with potential headwinds from higher labor costs and slowing topline growth from less demand and lower price gains.
• We see incremental fundamental risks for the Information Technology sector amid slowing economic growth and post-COVID headwinds, but we maintain U.S Information Technology exposure, as we believe it and other mid-phase U.S. sectors give portfolios an appropriate degree of economic sensitivity with less potential revenue and earnings deceleration than early-phase sectors as the economy slows.