Executive Summary
- The path of monetary policy remains the linchpin for the markets. We believe the Fed will hold current rates well into 2024.
- The lagged effects of tight monetary policy are likely to lead to higher risk asset volatility, though lower inflation prints could provide an offset. It is something of a race to the bottom, and it is unclear which side will get there first, inflation or the economy.
- Longer duration fixed income looks to be a good place to be while the above mentioned race ensues.
Fixed Income
Weight: Slight Overweight
Interest rates remain at levels not seen in more than a decade. Meanwhile, inflation has been coming down. The combination of these two factors are likely to translate into higher returns on an absolute and inflation adjusted basis.
U.S. Taxable Investment Grade
Weight: Modest Overweight
We currently favor higher credit quality exposure due to concerns over economic slowdown risks. We also find current interest rates to be very attractive, something we haven't been able to say for over a decade.
Duration
Weight: Modest Overweight
As economic growth decelerates we expect shorter term rates to fall. Shorter term rates falling faster then longer term rates typically occurs near the end of the Fed tightening cycle and accelerates when the Fed begins reducing rates.
U.S. Taxable Non-Investment Grade
Weight: Modest Underweight
The combination of recession risk and relatively narrow credit spreads keep us at a modest underweight, but are looking for an opportunity to add exposure should spreads widen.
Equities
Weight: Slight Underweight
Price declines in 2022 have created some buying opportunities, but a global economic downturn is not fully priced in. As valuations allow we will look to add more equity exposure.
U.S. Large Cap
Weight: Modest Underweight
Large cap valuations remain high on a historical basis as do profit margins, which remain near pre-pandemic highs, reducing earnings growth potential. The rally to date looks extended and our market breadth remains narrow.
Growth
Weight: Neutral
Growth stock outperformance year to date have been driven by a small group of stocks. Narrow leadership is typically not a healthy sign. While AI has created some excitement, for many of the leaders it has yet to translate into earnings growth.
Value
Weight: Neutral
More economically sensitive Value stocks are at risk of an economic downturn, though lower valuations should help provide some support. We currently remain neutral, but are looking for an opportunity to increase our exposure in anticipation of a Fed pivot.
U.S. Mid Cap
Weight: Modest Overweight
Mid-cap valuations are significantly below average on a historical basis versus their own history and relative to large caps. Mid-caps underperformed large caps despite stronger earnings growth over the past two years. Mid-caps have greater cyclical exposure than large caps, though less than small caps, and are likely to outperform when the economy recovers.
U.S. Small Cap
Weight: Modest Overweight
Regional banking concerns are easing and providing near-term asset class support. Small caps are experiencing a more significant revenue decline than large caps but could be poised for stronger growth next year, with easier comparisons.
International Developed
Weight: Modest Underweight
A less robust China re-opening is likely to weigh on trade-dependant Europe as well as tighter lending conditions. Additionally uncertainties remain with respect to the war in Ukraine. Valuations remain supportive.
International Emerging
Weight: Neutral
We removed our overweight given evidence of further economic weakness in China. Overall, emerging markets economic growth is still expected to outpace developed markets. Emerging market equities are trading at low valuations and lack lofty earnings expectations leaving
room for potential upside surprise.


*Reflects percentage point difference
Source: Touchstone Investments; assessments are made using data and information up to August 2023. For illustrative purposes only. Diversification does not guarantee investment returns and does not eliminate the risk of loss. Diversification among investment options and asset classes may help to reduce overall volatility.
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.