Nicholas Bohnsack
Chief Executive Officer

More to Come

The consensus continues to assign higher odds to a “soft landing” than other economic outcomes – notably, Recession – and equity positioning, while lower relative to total portfolio, still reflects this bias through a modest preference for Growth shares.  Interesting if one considers the environment…

April inflation readings surpassed expectations and though “peak inflation” is more of a mathematical construct, prices are still expected to remain elevated.  China’s local lockdowns in pursuit of their “Zero Covid” policy is causing further disruption in the global supply chain.  Europe appears to be heading for an economic downturn – if it is not in one already – given Russia’s invasion of Ukraine and related sanctions.  Global rates have continued their push higher, weighing on equities, and the U.S. 2/10 curve inverted in April.  The U.S. Dollar is at levels last seen nearly twenty years ago.  (The Euro is nearly at parity with the Greenback.)

After a month plus of heightened volatility punctuated by acute bouts of panic selling it will not be surprising to see tactical buyers emerge.  Looking ahead, should the current market drawdown persist into quarter end, particularly in Growth stocks, we would not be surprised if asset allocators – as a class – became net buyers of equities in late-Jun/early-July to build risk-adjusted positioning back to model.  In both cases we remain cautious.  While it is always possible – indeed likely – that a strong countertrend move will metathesize, we would be inclined to par back further from early-cyclical and “long duration” growth positions should a period of market strengthening emerge in the near-term and would reallocate in the comfort of higher quality and more defensive shares for the intermediate-term.  As such, we have positioned the Strategas Macro Thematic Opportunities Portfolio anticipating continued momentum in four thematic areas: “Inflation for Longer,” “Quantitative Tightening,” “Cyclical Defensives,” and “De-Globalization.”

While Covid and its health effects remain very much in the fore, a decade plus of post-GFC monetary leniency compounded by necessary (less necessary and wholly unnecessary) fiscal provisioning appears to have fostered such a sufficient misallocation of resources that recalibrating the global economy from disequilibrium is likely – in our view – to be protracted and, at times, painful.  In conversations with clients, we have continued to recommend both a reduction of broad Equity exposure as well as a rotation towards Value.  Last month (Apr’22) we reduced Equity exposure in our global asset allocation portfolios to a neutral 60% weighting from 62% (which we established in Sep’21) and down from a post-Pandemic rally high of 67% (Jan-Aug’21).  We are unchanged this month.  Within Equities, however, our portfolio construction since 4Q’21 has increasingly tilted toward U.S. Domestic shares, particularly Large-Cap Value with targeted neutral-to-underweight allocations to Large-Cap Growth, Large-Cap Core, Developed International, and Emerging Markets.

Source: Bloomberg

We are adding to Treasuries this month, as we did in April.  Like the material above-benchmark allocation to Equities we had established following the brunt of the pandemic induced sell-off, given the application of fiscal and monetary policy during the same period we maintained a significant below-benchmark position in broader Fixed Income and to U.S. Treasuries.  With the recent back-up in rates at the long end of the curve we are increasing exposure to reduce this underweight as well as to reduce our underweight to duration.  We anticipate natural buying from liability book managers to grab some portfolio yield while improving the quality of their holdings.  We are increasing our broad allocation to Fixed Income by +200 bps to 32% from 30% by deploying some of the portfolio’s Cash (we retain a 6% position to Cash & Equivalents of which 4% is in Gold).  Within Fixed Income we are reducing exposure to both Bank Loans and short-duration Investment Grade Corporates, both of which have been steady out-performers over the last several quarters and increasing long-duration IG holdings along with Treasuries.

Last summer (June, 2021), anticipating inflation would prove less transitory than policymakers hoped, we used a portion of our elevated Cash balance to establish a small position in Gold (2%).  In October 2021, we increased our position to 4%, using half of our Cash.  With the increased correlation between stocks and bonds, making it more challenging to hedge one with the other, we have established a beachhead position in the ostensibly less correlated Alternative asset sleeve, namely Commodities.  While the timing may seem spurious given the recent run in nearly all commodity segments, we are compelled by both the risk management profile, particularly in more liquid corners, as well as the fundamental underpinnings we see in Commodities given increasingly structural dislocation in global supply chains and the thematic momentum behind de-globalization.  

Source: Bloomberg

While not a position in our allocation portfolios, we are inclined, given the number of client questions on the topic in recent weeks, to note the acute sell-off in cypto currencies.  Particularly notable is the sharp increase in Bitcoin’s rolling correlation with the broader equity market (and those of higher Beta alt coins).  While there may be merit in the (very) long-term case for digital currencies as part of an evolved global currency regime, we are on the sidelines until the use case is proved outside a period of easy money. 

Source: Bloomberg

The outlook remains uncertain.  There exists, as our chief economist Don Rissmiller has discussed, narrow paths to less severe resolutions of the various disequilibrium in the economy.  Yet they are narrow and – in our view – narrowing.  Stay focused.  NB

 

 

Published on May 23, 2022. The information is current only as of the date of this communication and we do not undertake to update or revise such information following such date. This communication is provided for informational purposes only and is not an offer, recommendation, or solicitation to buy or sell any security.  This is not a complete analysis of every material fact regarding any company, industry, or security. Additional analysis would be required to make an investment decision. This communication is not based on the investment objectives, strategies, goals, financial circumstances, needs or risk tolerance of any particular client and is not presented as suitable to any other particular client. Past performance does not guarantee future results. All investments carry some level of risk, including loss of principal.