An considering the fallout from the changing economic environment, investors will need to readjust their investment strategies and portfolios.
During the recent webcast, What rising rates and a changing economic landscape mean for your portfolio, Matthew Bartolini, head of SPDR® Americas Research, State Street Global Advisors, notes that continued headwinds such as inflation, the ferocity of the Fed and Russia’s war with Ukraine have all weighed on the asset classes. active last month. The drop in supply and the rebound in demand post-COVID also contributed to the continued outperformance of commodities.
On the fixed income side, Bartolini pointed out that as yields rose, bonds continued to post losses, led by long-dated, higher-quality credits, while senior loans held up better. The benchmark US Aggregate Bond Index also suffered its worst decline on record in the first quarter.
Short-term inflation expectations have risen considerably since December, fueling expectations of more aggressive monetary tightening this year. The futures markets are even counting on a 90% probability of at least a target rate of 2.25% by the end of this year.
“With real yields low, investors should look to target credit markets that are outperforming inflation expectations while reducing duration,” Bartolini said.
Meanwhile, Bartolini pointed to implied volatility, which has fallen slightly since March and the start of the war, with rate volatility at its highest level since the start of the pandemic.
In this type of market environment, retail investors, hedge funds and controlled risk exposures reduced their equity exposure amid high stock and bond volatility. Investor sentiment remains negative, with bullish AAII indicators entering their three-year tenth percentile in April.
Turning to markets, historical valuations of US value and growth funds hovered around their top decile in April. Earnings sentiment has weakened across most regions, as evidenced by more downgrades and weaker growth estimates. Additionally, sharp earnings revisions and growth estimates in energy have improved the broader market’s earnings outlook, while analysts have turned less optimistic about growth in most other sectors, Bartolini adds. .
To help financial advisors better adapt to these market conditions, Eric Biegeleisen, Partner, Deputy Chief Investment Officer, 3EDGE Asset Management, introduced the 3EDGE Model Portfolio Solutions. Their multi-asset core solutions include a conservative strategy mixed portfolio holding primarily fixed income securities and also including equities and real assets. The total return strategy includes a mixed portfolio holding a combination of equities, real assets and fixed income securities. The growth strategy includes a mixed portfolio with the potential for high equity holdings. It also includes real assets and fixed income securities. Additionally, the income solution’s more multi-asset income strategy includes a mixed portfolio of traditional equity income and fixed income sources as well as non-traditional income sources.
These types of portfolio solutions can help financial advisors readjust their investment portfolios to a regime shift, as the rules of investing have changed in an environment dominated by inflationary forces such as negative real interest rates, the strengthening of unions, the rise in wages, the increase in local production, the inclination towards short-term assets and the rise of real assets.
Greg Ellston, Chief Investment Officer — Asset Allocation, Confluence Investment Management, notes that the Federal Reserve has adopted a much more hawkish monetary policy in its attempt to fight inflation. Global central banks, on the other hand, have varying policy responses ranging from very accommodative to increasingly hawkish. Therefore, given the changing landscape, the risk of a policy mistake leading to an economic slowdown or even a recession has increased.
Due to this changing economic and market outlook, Ellston is advocating for portfolio adjustments, such as fixed income exposure at the mid-point of the yield curve and reduced equity exposure to an underweight. in all wallets. Additionally, commodities could be on the cusp of a multi-year bull market.
“In the equity exposure, we maintain a value bias,” Ellston says. “We have also become more defensive in our sector allocations.”
Confluence Investment Management LLC also offers a suite of ETF model portfolio strategies, such as the Income Strategy, which primarily focuses on reliable income and is suitable as a complementary strategy for investors in the distribution phase of their investments. Confluence’s Income with Growth strategy focuses on reliable income, moderate volatility, long-term growth and capital preservation. Additionally, Confluence’s growth and revenue strategy combines growth and revenue objectives with a greater emphasis on growth.
Financial advisors interested in learning more about rising rate portfolio strategies can watch the webcast here on demand
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.