The March 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.

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 has recently bounced from historically low levels but remains below its long-term median. This reading suggests that markets have become less complacent in recent weeks. Still, we think that the CI has room to increase on potential market volatility without signaling a crisis.

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

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 potentially rattle the markets. We continue to see compelling opportunities on the other side of what we expect to be near-term economic and market challenges.


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