Our Blog Feb 10, 2017
Don’t overthink it; growth-friendly policies are good for stocks and not so good for bonds.
Investment returns may ebb and flow with data releases and tweets, but there are still good reasons to slowly increase risk in investment portfolios. February through May has been a good time to own equities over the past five years, and with market indicators suggesting the same for this year we don’t want to be too cautious.
Equity: We maintain a neutral position in equity but are preparing to tactically overweight the asset class. U.S. equity markets have responded well to Trump’s agenda for corporate tax cuts and deregulation, and international markets have as well with several international equity indices outperforming the S&P 500 Index in December and emerging markets returning more than 5% in January.
Within equity: We continue to favor non-U.S. equity markets, specifically emerging market equities. If bond yields and the U.S. dollar stop rising, non-U.S. markets will have the opportunity to catch up with U.S. equity performance. This has already begun for international developed equity markets.
Fixed income: Duration indicators suggest we should be cautious about taking duration risk overall. Inflation trends and negative momentum suggest we refrain from upgrading our fixed-income position at the moment.
Within fixed income: The fixed-income outlook has not changed significantly since last month. We have a conservative outlook for interest rate risk and are slightly underweight investment-grade corporate bonds following their recent outperformance. We also believe emerging market bonds represent an opportunity.
Alternatives: Alternatives have provided a benefit since the U.S. election by diversifying interest rate risk, and commodities remain particularly attractive. We expect diversification benefits to improve as markets move beyond a strict dependence on monetary policy.
Currency: Currency indicators are providing a mixed message. Initially Trump’s agenda was viewed as good for the U.S. dollar, and investing in the U.S. dollar has been useful in guarding against market tantrums. However, most of the U.S. dollar’s gains post-election were lost in January and a strong U.S. dollar would generally be unfavorable for emerging market stocks and commodities.