This month, during our investment committee meeting, we made no changes to our global tactical portfolios. We believe these are our best meetings because it means our monthly process has built conviction in our global macro view and our current allocations. As we dive into summer, we wanted to re-affirm our strongest views, how they’ve adapted and how they’re affecting our asset allocation.

For some time, our view is that the economy is accelerating from the “covid-sized” hole created in 2020. As economies re-opened and activity began to surge, this view has now become consensus among investors, according to the Bank of America Fund Manager Survey (Chart 1).

Exhibit 3

Chart 1

But as the tailwind from stimulus fades and the vaccination campaign winds down, economic momentum has likely peaked with expectations. Historically, a slowdown in growth has been associated with lower overall equity returns. But this is expected: the next leg of the rally in risk assets will not have the strength of the past year. However, we believe there are reasons to expect this “slowdown” to be relatively benign and remain overweight risk assets (especially certain pockets).

First, US growth is slowing from exceptionally strong levels and will remain above-trend. The golden rule of investing is to stay bullish on risk assets unless one think’s there is a recession around the corner (Chart 2). In our view, growth is highly unlikely to turn contractionary anytime soon.

Chart 13

Chart 2

And most importantly, we expect that monetary policy will remain highly accommodative in the face of what is likely to be a transitory increase in inflation. In our last two Markets in Motion (March 2021, April 2021), we spoke at length on our view to fade inflationary fears over the next couple of years. With no structurally higher inflation, the Fed can afford to sustain exceptionally easy monetary policy, which should keep growth above-trend and continue to support equity valuations.  

And if inflation fears recede, the economic environment will begin to change from a period of reflation to goldilocks (chart 3).

Chart 3

Chart 3

This would trigger rotations from cyclical/value exposures back into quality/growth exposures. The fuel for this rotation will come from one-sided positioning into the inflation trade. Tech funds have seen their largest outflows since December 2018, another short-term bottom for the sector. We have an overweight to stocks with these characteristics within our portfolios. In this environment, bonds will likely remain rangebound over a tactical timeframe. However, we will continue to avoid allocations to bonds, as it would be like picking up pennies in front of a bull dozer before yields continue their move higher. Therefore, we remain overweight stocks and credit, with a focus on quality/growth factors.

Finally, know that all our Strategies will adapt to fundamental or rules-based, not emotional influences. We seek opportunities for solid risk adjusted returns and to preserve capital in asset market downturns.

Originally published by Donoghue Forlines, 5/27/21

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