The January 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 now sits firmly at its long term median, suggesting a healthy balance and well-functioning market. While we may hold cash tactically to take advantage of opportunities, large cash positions may be ill advised.

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

Strategic View

Equity 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. However, we are upgrading 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, our work and historical precedent suggest 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  with continued restrictive U.S. Federal Reserve policy action.

Fixed Income Favorability: Our current outlook has us increasing both credit quality and interest rate sensitivity. We have tilted our fixed income exposure away from corporates in favor of Treasuries at attractive valuations. In addition, our outlook for interest rates has us favoring longer-duration, more interest rate sensitive fixed income.

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. In addition, the strength of U.S. household balance sheets adds to solid U.S. fundamentals. That said, the risks associated with central bank policy tightening remain. As a result, while the risks of a global recession are high, the economic impact should be muted. We expect that a collapse in the rate of U.S. inflation will soon cause the U.S. Federal Reserve to pause. We expect continued economic and market challenges ahead, but anticipate improving economic conditions later in 2023. These improvements will likely be preceded by improving market conditions. Investors should remain disciplined and ready to react accordingly.

Tactical View

*areas that we are tactically emphasizing

Global Broad Outlook: We are now cautious about the U.S., along with our concerns over foreign economies.

Global Broad Outlook


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