Asset Allocation Chart of the Month
The Fed is Moving in a Market Friendly Direction
- Market Concerns. As we travel and meet with advisors, we sense widespread caution. Even bullish advisors tend to be hesitant, while many clients remain on the sidelines, still holding large cash positions. Concerns range from high valuations and market concentration to slowing growth and potential policy missteps. While we share some of these worries, we are supportive of fully invested positioning as a recession is unlikely and don’t expect the Fed to turn hawkish anytime soon.
- Easing ≠ Bear Market. Historically, bear markets have coincided with or followed the Fed shifting toward a tighter money stance and hiking rates (even the dot-com boom was preceded by a tightening cycle). We view a new hiking cycle in the next year or two as unlikely, as it would require both a strong economic rebound and a resurgence in inflation.
- Easing Cycles. As we highlighted in a past Chart of the Month (link), rate cuts during periods of economic expansion have historically supported equities. Looking back to the early 1980s, we identified five such non-recessionary easing cycles. On average over those cycles, the Russell Top 200 index returned 15.8% and the Russell 2000 returned 15.4% in the subsequent 12 months.
- High Valuations. While valuations are elevated, they can remain high as long as the economy and earnings grow. That said, rich valuations increase stock-specific risk. When valuations are extended, sell-offs of individual stocks can be harsher when a negative catalyst emerges. Diversification and active management can help mitigate this risk.
- Skepticism. We would be more worried if optimism were widespread. Instead, sentiment remains cautious, and many investors are hoping for a market pullback as an opportunity to deploy cash – not the hallmark of euphoria.
- Consider Mid Caps. Over the past five years, mid caps have significantly outperformed small caps, breaking their historical high correlation. The shift reflects mid caps’ stronger exposure to higher-growth sectors like industrials, tech, and health care, as well as superior profitability and financial strength. With sector weights and quality metrics now resembling the equal-weighted S&P 500 but at a discount, mid caps present a compelling alternative to broad large cap exposure.
- Consider International. After 15 years of lagging U.S. equities, we believe the prospects for international equities are improving. Much of the past underperformance stemmed from U.S. dollar strength and multiple expansion in U.S. stocks. These headwinds are unlikely to persist, leaving international equities on more even footing.
The Touchstone Asset Allocation Committee
The Touchstone Asset Allocation Committee (TAAC) consisting of Crit Thomas, CFA, CAIA – Global Market Strategist, Erik M. Aarts, CIMA – Vice President and Senior Fixed Income Strategist, and Tim Paulin, CFA – Senior Vice President, Investment Research and Product Management, develops in-depth asset allocation guidance using established and evolving methodologies, inputs and analysis and communicates its methods, findings and guidance to stakeholders. TAAC uses different approaches in its development of Strategic Allocation and Tactical Allocation that are designed to add value for financial professionals and their clients. TAAC meets regularly to assess market conditions and conducts deep dive analyses on specific asset classes which are delivered via the Asset Allocation Summary document. Please contact your Touchstone representative or call 800.638.8194 for more information.
A Word About Risk
Fixed-income securities can experience reduced liquidity during certain market events, lose their value as interest rates rise and are subject to credit risk which is the risk of deterioration in the financial condition of an issuer and/ or general economic conditions that can cause the issuer to not make timely payments of principal and interest also causing the securities to decline in value and an investor can lose principal. When interest rates rise, the price of debt securities generally falls. Longer term securities are generally more volatile. Investment grade debt securities may be downgraded by a Nationally Recognized Statistical Rating Organization to below investment grade status. Non-investment grade debt securities are considered speculative with respect to the issuers' ability to make timely payments of interest and principal, may lack liquidity and has had more frequent and larger price changes than other debt securities. Equities are subject to market volatility and loss. Growth stocks may be more volatile than investing in other stocks and may underperform when value investing is in favor. Value stocks may not appreciate in value as anticipated or may experience a decline in value. Stocks of large-cap companies may be unable to respond quickly to new competitive challenges. Stocks of small- and mid-cap companies may be subject to more erratic market movements than stocks of larger, more established companies. Investments in foreign, and emerging market securities carry the associated risks of economic and political instability, market liquidity, currency volatility and accounting standards that differ from those of U.S. markets and may offer less protection to investors. The risks associated with investing in foreign markets are magnified in emerging markets, due to their smaller and less developed economies.
The information provided reflects the research and opinion of Touchstone Investments as of the date indicated, and is subject to change without prior notice. Past performance is not indicative of future results. There is no assurance any of the trends mentioned will continue or forecasts will occur. Investing in certain sectors may involve additional risks and may not be appropriate for all investors. The indexes mentioned are unmanaged statistical composites of stock or bond market performance. Investing in an index is not possible. For Index Definitions see: TouchstoneInvestments.com/insights/investment-terms-and-index-definitions
Please consider the investment objectives, risks, charges and expenses of the fund carefully before investing. The prospectus and the summary prospectus contain this and other information about the Fund. To obtain a prospectus or a summary prospectus, contact your financial professional or download and/or request one on the resources section or call Touchstone at 800-638-8194. Please read the prospectus and/or summary prospectus carefully before investing.
Investment return and principal value of an investment in a Fund will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. All investing involves risk.
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