Global Conservative portfolio positioning intra-quarter update as of 9/13/2022

With deterioration in some economic data and the Fed’s aggressive monetary policy tightening, we see increased risks and have moderately increased the portfolio’s overweight of defensive sector allocations.

September 13, 2022

ACTIONS and OVERVIEW:

Reduced U.S. mid-phase equity sector overweight

• Trimmed existing U.S. Comm. Services sector ETF holding
• Trimmed an existing U.S. broad Info. Tech. ETF holding

New allocation to late-phase U.S. Consumer Staples sector

• Added new U.S. Consumer Staples ETF position

Modestly overweighted fixed income/underweighted equities

Reduced overweight of corporate bonds, added to Treasury exposure

• Trimmed two corporate bond ETF holdings
• Added a new floating-rate Treasury bond ETF position
• Added to two existing Treasury  bond ETF holdings

Portfolio Rebalance

Recent economic developments, including deterioration in some economic data and the Fed’s monetary policy stance, point to later-cycle economic conditions, with slower economic growth and increasing recession risk, in our view. Thus, we believe added exposure to defensive allocations is appropriate.

We recognize that many core U.S. economic readings remain sound, including consumer spending, business investment, and labor market data, and the U.S. economy is likely, in our view, to deliver positive real GDP growth in Q3. Looking forward, however, we see increased headwinds to consumer spending and business investment, which we believe could contribute to earnings shortfalls relative to consensus estimates, particularly for more economically sensitive sectors.

We have also taken the opportunity to rebalance portfolios.

UPDATE DETAIL:

Reduced U.S. mid-phase equity sector overweight

• While we still see positive secular trends for the mid-phase Information Technology and Communications Services sectors, consensus estimates for those sectors may be too optimistic, given factors like digital ad pricing pressure, prior pull-forward of demand, and broader cyclical headwinds.

New allocation to late-phase U.S. Consumer Staples sector

• We believe that during both the slowdown and recession stages of economic cycles, U.S. Consumer Staples earnings should remain more resilient than the broad market, even with potential headwinds from input cost inflation and slowing topline growth.

Modestly overweighted fixed income/underweighted equities

• After the renewed move higher in interest rates in recent weeks and the worst year-to-date performance for U.S. bonds in over four decades, we believe risks to fixed
  income market returns have now diminished.
• Meanwhile, restrictive monetary policy and related headwinds to economic growth increase uncertainty and the risks to equities’ earnings growth in our view.
• Given the adjusted risk-reward profiles we see for fixed income and equities, we believe a moderate overweight of fixed income and underweight of equities is appropriate.

Reduced corp. bond overweight, added to Treasury exposure

• Slower economic growth and tighter monetary policy could contribute to further widening of corporate credit yield spreads, which remain below long-term averages; thus, we have shifted some exposure from corporate bonds to Treasury securities, including a new floating-rate Treasury allocation which we expect to benefit from an upward move in short-term interest rates as the Fed continues to tighten.
• We retain a moderate overweight to corporate bonds, however, as corporate balance sheets remain healthy, in our view, with cash at the highest percentage of assets since the 1940s and profit margins near all-time highs.