The February 2023 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.

Cash Indicator

Our 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 continues to sit near its long-term median, which implies a well-functioning market. While our fundamental work suggests caution, the CI reflects a healthy market with little risk of an outright crash.

Strategic View: Equity and fixed income valuations remain attractive, which increases our long-term expectations.

Strategic View

Equity Valuations: Equity valuations by different measures have fallen below their longer-term averages. Attractive valuations improve our long-term outlook for the equity market.

Equity Favorability: We continue to favor defensive U.S. equities over foreign. However, we have upgraded our foreign outlook as the euro zone has done a tremendous job in dealing with their energy issues related to the war in Ukraine. This reduces the risk of a deeper euro zone recession in our opinion.

Fixed Income Valuations: With the yield curve persistently inverted and broad money growth falling, we expect that headline inflation (CPI) and 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 with continued restrictive U.S. Federal Reserve policy action.

Fixed Income Favorability: We remain overweight U.S. Treasuries including floating rate at the short end of the yield curve, and interest rate sensitivity. We are underweight credit sensitivity as we expect those areas to underperform in a challenging economic environment.

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

While our global economic outlook remains cautious, we are seeing signs that the most acute risks of an energy shock in the euro zone will likely be avoided. Still, we are underweight equity and credit sensitivity as we expect near-term economic challenges to rattle the markets.

 Equity U.S. » consumer staples*, financials*, health care*, technology*

Global » dividends, infrastructure, low volatility, quality

 Fixed Income short and intermediate-duration asset-backed and mortgage-backed securities, floating rate, short, intermediate, and longer-duration Treasuries*, taxable munis*
 Alternatives managed futures, master limited partnerships (MLPs)*, put option overlay strategies

*areas that we are tactically emphasizing

Global Broad Outlook: We remain cautious about the global economy and markets as economic weaknesses persist.

Global Broad Outlook

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