The December 2022 Dashboard: Our Three Layers of Risk Management

Our Cash Indicator methodology acts as a plan in case of an emergency. This is analogous to the multiple safety systems in a modern automobile, which includes an airbag. Importantly, each of these systems work together to potentially help smooth the ride.

We manage risk within our strategic, long-term allocations based on diversification across equity, fixed income, and alternative assets and a focus on more attractive relative values.

We manage risk tactically over the short-term by investing across a broad array of themes and asset classes including cash. We can either invest opportunistically or defensively depending on the environment.

Cash Indicator: Markets are functioning properly but we expect continued volatility.

The December 2022 Dashboard: Our Three Layers of Risk ManagementOur proprietary Cash Indicator (CI) provides insight into the health of the market by monitoring the level of fear using equity and fixed income indicators. This warning system is designed to signal us to either a 25% or 50% cash position to potentially protect principle and provide liquidity to reinvest at lower and more attractive valuations.

The CI has fallen back to its normal range as markets are now reflecting average levels of risk. Given our cautious outlook, we expect the CI level to move higher in the coming months. Still, the CI is well below levels that would suggest a high risk of a market breakdown.

Strategic View: Both equity and fixed income valuations have become more attractive with recent market declines.

The December 2022 Dashboard: Our Three Layers of Risk ManagementEquity Valuations: Equity valuations by different measures have fallen below their longer-term averages. Attractive valuations improve our long-term outlook for equity market.

Equity Favorability: We continue to favor defensive U.S. equities over foreign. Though we still hold high quality and defensive foreign assets, in recent months we have reduced our foreign exposure in favor of alternative investments and fixed income.

Fixed Income Valuations: With the yield curve persistently inverted, our work suggests that long-term interest rates will decline over the next year or two. The 10-year Treasury yield looks attractive when over 3% while very short-term interest rates should move higher based on central bank policy.

Fixed Income Favorability: Over the last few months, we have been adding to Treasuries to increase credit quality and interest rate sensitivity. Treasuries may provide protection in case of economic turmoil that would cause corporate bonds to underperform. Longer-duration, more interest rate sensitive fixed income should benefit from declining long-term interest rates while still offering attractive yield.

Tactical View: We favor defensive equity, fixed income, and alternative investments.

While we remain concerned about foreign markets, our outlook for the U.S. has become more cautious. We now think a recession in the U.S. is likely. As this is our base-case scenario, our positioning is now more conservative as we have further reduced our equity exposure and increased our credit quality by adding Treasuries. The equity exposure we do have is generally defensive with healthcare and consumer staples being our largest overweights. Given the current risks and potential headwinds facing the markets today, we think that a conservative approach with a focus on consistency and protection is warranted across both the equity and the fixed income markets.

The December 2022 Dashboard: Our Three Layers of Risk Management

Any forecasts, figures, opinions, or investment techniques and strategies explained are Stringer Asset Management LLC’s as of the date of publication. They are considered to be accurate at the time of writing, but no warranty of accuracy is given and no liability in respect to error or omission is accepted. They are subject to change without reference or notification. The views contained herein are not be taken as an advice or a recommendation to buy or sell any investment and the material should not be relied upon as containing sufficient information to support an investment decision. The views and opinions expressed are soley those of the original authors and other contributors. This material is for informational purpose only. Investments discussed may not be suitable for all investors. No part of the authors’ compensation was, is, or will be directly or indirectly related to the specific views contained in this report. Information provided is obtained from sources deemed to be reliable; but is not represented as complete, and its accuracy is not guaranteed. Past performance is not indicative of future results. The securities identified and described may not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that an investment in the securities identified was or will be profitable.