Asset Allocations: Trimming risk in Q4
The signals of late cycle behavior continue to grow louder. While asset prices might show some resilience, we favor taking lower-than-average risk across asset classes.
Change from previous quarter
|U.S. large cap|
|U.S. small cap|
|U.S. investment-grade corporates|
|U.S. floating-rate bank loans|
|U.S. high yield|
|Non-U.S. developed country|
Currency viewsU.S. dollar versus
|Favor other||Neutral||Favor dollar|
We have very slight overweight to U.S. large-cap equity
The current deterioration in economic activity and capital investment is slow moving, in our view. As such, at seems possible that what we see as a gap between risk asset prices and fundamentals could last for a bit longer. At the same time, we take little solace in the bull's argument that stocks are the only alternative. Volatility spikes, similar to those of the fourth quarter of 2018 and of May and August of 2019, are likely to persist and are typical "late-cycle" behavior.
We continue to be underweight riskier parts of the credit market
We have moved from an underweight to neutral in U.S. government fixed-income securities. We are maintaining underweights to investment-grade corporates, floating-rate bank loans, high yield corporates, and both non-U.S.-developed-market and emerging-market debt.
We have an underweight to commodities
During the third-quarter earnings season, which begins in earnest in the third week of October, we will be paying close attention to corporate commentary about growth expectations and capital expenditures.