Global Conservative portfolio positioning intra-quarter update as of 1/22/2021
Modestly increased equity allocation, moving to an overweight, and reduced fixed income allocation, moving to an underweight
January 22, 2021
Increased target equity allocation to a modest overweight
- Added to existing equity ETF holdings on a pro rata basis
Decreased target fixed income allocation to a modest underweight
- Trimmed existing fixed-income ETF holdings on a pro rata basis
Given our outlook for continued economic recovery, as well as the prospective interest rate and political environments, we have increased the equity allocations and reduced the fixed income allocations within the Global Balanced strategy. While equity valuations are not especially cheap, we see the risk of recession in the intermediate-term as limited, and we see an increased likelihood that earnings surpass investors’ expectations in 2021 and 2022. In addition, we expect longterm interest rates will move modestly higher in conjunction with economic environment. These factors have a net positive impact on the risk/return profile for equities, in our view, and a negative impact on the risk/return profile for fixed income. Thus, we believe the incremental reallocation from fixed income to equities is currently warranted.
In conjunction with these adjustments, we have also rebalanced the portfolio.
Moved to overweight of equity exposure and an underweight of fixed income exposure:
- We believe equity returns are likely to exceed fixed income returns on an absolute and risk-adjusted basis over the next 12-24 months, as equity earnings growth should offset potential valuation compression, while fixed-income returns could be flat or down slightly, given low current yields and the risk that interest rates rise moderately.
- The risk of a U.S. recession in the next 12 to 18 months is below normal, in our view, given the economy’s recent transition back to growth, low interest rates, extensive fiscal support, and high level of liquidity. Record fiscal stimulus in 2020 resulted in approximately $1.2 trillion in excess consumer savings – the equivalent of about 28% of consumers’ annual discretionary spending – before the December relief package and any potential additional stimulus that could provide even more fuel for consumer spending and economic growth throughout 2021.
- We believe earnings growth in the U.S. will surpass current consensus expectations in 2021 and 2022, driven by traditional cyclical factors like pent up demand and the stimulus that has been injected into the economy across consumer, business, and government segments.
- Equity valuations, while high on an absolute basis, are below their 20-year historical average when adjusted for the low level of interest rates. Our outlook incorporates that a rise in interest rates could contribute to equity market volatility and some P/E multiple compression.
- We anticipate the Treasury yield curve is likely to steepen in 2021, consistent with other early-phase economic
recoveries, which presents risks for fixed income returns, including the potential for negative returns over the next year, as the negative impact of rising longer-term interest rates on bond returns could more than offset income return from current low yields.