Executive Summary
- Following Liberation Day we shifted to a slight Fixed Income overweight, emphasizing investment grade debt. This move primarily responded to increased recession risks following the magnitude of the tariff announcement.
- The pausing of most of the tariffs just days later underscores how fluid and unpredictable the environment has become.
- We also reduced exposure to developed international equities. While dollar weakness benefits U.S. investors, euro and yen strength can weigh on foreign corporate profits. We also have growing concerns with these export-driven economies given expected economic slowing among their two largest trading partners (U.S. and China).
Fixed Income
Weight: Slight Overweight
We shifted to a slight overweight as recession risks have risen. With bond yields near 10-year highs, fixed income offers compelling income opportunities and competitive return prospects relative to equities.
U.S. Taxable Investment Grade
Weight: Moderate Overweight
We tactically increased our investment-grade bond exposure to a moderate overweight, attracted by appealing risk-adjusted return potential from higher yields and lower economic sensitivity.
Duration
Weight: Neutral
We remain neutral on duration, as we believe interest rate risks have become more balanced. Slowing economic growth could put downward pressure on yields, while sticky inflation and potential disruptions from rising public debt and budget negotiations could push yields higher.
U.S. Taxable Non-Investment Grade
Weight: Slight Underweight
We maintain a slight underweight to high-yield bonds due to economic risks. However, loose credit conditions, higher index quality, and a manageable maturity wall keep us from getting more defensive.
Equities
Weight: Slight Underweight
We are slightly underweight equities overall, driven by reduced exposure to both EM and developed international stocks. Within US equities, we continue to favor mid-caps.
U.S. Large Cap Blend
Weight: Neutral
We see heightened earnings risk for the S&P 500 due to tariffs, DOGE, and immigration policies. As a result, we have lowered our return expectations, increasing the attractiveness of other asset categories.
Growth
Weight: Moderate Underweight
We remain underweight Growth due to high stock-specific risks among top constituents including antitrust concerns, significant international exposure, and elevated valuations.
Value
Weight: Neutral
We removed our slight Value overweight given greater economic sensitivity within the index and lack of valuation support.
U.S. Mid Cap
Weight: Overweight
We maintain a mid-cap overweight, favoring the segment for its attractive valuations, lower international exposure, and less economic risk compared to small caps. Within mid caps, we prefer high-quality companies with strong cash generation.
U.S. Small Cap
Weight: Slight Underweight
We remain slightly underweight small caps due to greater earnings risk. Small business owner sentiment has turned down, particularly around capital spending and hiring.
International Developed
Weight: Slight Underweight
We removed our slight overweight in early April. Higher-than-expected US tariffs, currency strength, and weakening economic conditions in the US and China, create earnings risk for international companies.
International Emerging
Weight: Slight Underweight
We remain slightly underweight, given the potential drag from delayed Fed rate cuts, lack of dollar weakness versus EM countries, and broader tariff threats on China and beyond.
Strategic: Strategic asset allocation is a baseline allocation between asset classes established with a longer term focus and congruent with an investor’s investment goals and objectives. The allocation is meant to optimize the asset mix through methodical diversification in an attempt to maximize return and lessen risk.
Tactical: Tactical asset allocation is differentiated from strategic asset allocation by having a much shorter time horizon and the goal of adding alpha beyond what would be allowed through static strategic weights. Markets tend to be more volatile over shorter time horizons, while longer time frames tend to smooth out that volatility. That enhanced volatility in the short term creates the opportunity for either return enhancement and/or risk reduction by adding to or reducing weights of different asset classes.