Asset Allocation
The market narrative continues to be dominated by the Magnificent Six, which drove both market performance and strong Q4 earnings results. While all sectors and styles have recently turned green, the rally is still mostly narrow. Earnings growth appears to be strong, but outside of the Magnificent Six, many companies are struggling. The market appears expensive and overbought, but that is mostly down to the high valuations and the popularity of the Magnificent Six.
In this Strategy Insight, we take a comparative look at two of the largest spread product sectors in Europe – Italian government bonds and investment grade corporates. We make the case for favoring Italy over investment grade in the event of a downturn in European economic sentiment.
In this BCA Special Report, we ask what policies investors should expect if Donald Trump wins the 2024 Presidential election. The answer is that a second Trump term would be much less positive for risky assets than the first. While the US will remain democratic and geopolitically preeminent no matter the outcome of the 2024 election, a second term Trump administration would likely oversee large budget deficits, continued wealth inequality, labor shortages, high import prices, and an erosion of checks and balances, possibly including at the Federal Reserve. Trade policy under a second Trump presidency represents the greatest cyclical risk to investors, and the sequencing of policies in general will be important to monitor. An early legislative priority of immigration over tax cuts, alongside the rapid imposition of new tariffs, would be the worst alignment for risky assets.
MacroQuant upgraded equities to overweight in February on a tactical short-term (1-to-3 month) horizon, but it continues to see downside risks to stocks on a medium-term (12-month) horizon. Consistent with the model’s relatively somber medium-term growth outlook, it sees more downside for bond yields on a 12-month horizon than on a 1-to-3 month horizon.
Reported earnings for Q4-2023 were rather underwhelming and prone to issues that we have identified over the past few months: Growth is concentrated in just a few sectors and companies, while the profitability of a broad swath of the equity market is under pressure from disinflation and sticky wages. Consumers are still spending, but less enthusiastically than before, while a switch from spending on services to spending on goods is in its very early innings. Downgrade Consumer Staples to neutral.
Recessions often begin seemingly out of the blue when the economy’s temperature falls enough to set in motion adverse feedback loops that cause unemployment to rise. We expect the US economy to suddenly freeze over towards the end of this year or in early 2025. For now, a benchmark allocation to equities is appropriate, but a more defensive stance will be necessary later this year.
We created a sector selection scorecard based on performance of sectors under various macroeconomic regimes while taking into consideration revisions to expected earnings growth and valuations in a historical context. Our total sector selection scorecard suggests overweighting defensives such as Utilities, and Consumer Staples, and underweighting cyclicals such as Consumer Discretionary, Industrials, and Financials. Considering this analysis, we have adjusted our sector positioning accordingly.