Market Themes
We still remain bullish with the portfolios we manage overweight with equities and modest adjustments to recognize recent moves in the bonds and specifically the Treasury market. To account for inflation, we’ve been adding to U.S. treasury inflation-protected securities (TIPS) and with the recent pullback we’ve been able to acquire them at a relative discount.
Tempering cyclical sector bets, seeking to capture more exposure to interest rate volatility. Based off of recent positive earnings surprises and revised projections we’ve shifted some of the allocations into Developed Market equities.
When possible, we’ve taken profits on some of the recently appreciated fixed income investments.
Portfolio Changes Since Last Quarter
Overall Asset Allocation
Trade Rationale
- The recent ‘growth scare’-driven market shakeup has been surprising and appears overdone given our expectation for exceptional economic strength. Several consecutive quarters of positive earnings surprises and persistently strong economic data do not corroborate such a dramatic repricing of lower growth expectations. Consequently, we still believe a cyclicals-led rebound remains intact.
- We do not believe the Fed will move to taper asset purchases and raise interest rates sooner and more aggressively than they let on and that they will remain patient. Second, that the Delta variant will disrupt the economic restart; we believe the successful rollout of vaccination programs across developed economies will be sufficient to thwart any return of the more draconian COVID-era restrictions. Lastly, that current elevated inflation is predominately and reliably ‘transitory’; we aren’t so sure. In our view, housing and rent inflation, wage growth, booming demand for energy amidst uncommonly tight supply, and more confident corporates emboldened with pricing power are all potentially durable drivers of inflation.
- Record amounts of consumer savings, wealth creation and pent-up demand have driven and will continue to drive the US economic expansion. International economies, namely Europe, have similarly attractive backdrops, but have to-date lagged in the recovery due to delayed vaccine rollouts. Moving forward, international equities may be well positioned to play catch up as restart dynamics broaden beyond the US and cross the Atlantic.
Portfolio Performance
The melt-up in stocks continued to sizzle over the early part of the summer, epitomized by pre-pandemic levels of suppressed volatility and the S&P500’s fresh eclipse of all-time highs. However, the latter half of the second quarter saw a conspicuous rotation of the names driving the indices higher. Many of the trades that led the risk-on rally the last 6-8 months lost some bravado, potentially weakened by bubbling investor concerns regarding the Fed’s tolerance for inflation, the resilience of the reopening, and a more subdued economic outlook.
Growth and technology stocks reassumed their perch as style and sector stalwarts, flexing their muscle amidst another impressive earnings season, but may have benefited most decisively as longer-term rates drifted lower and elevated inflation expectations eased. Despite the trend reversal, energy stocks and commodities remained some of the best performing assets over the quarter, supported by sustained strength in crude oil prices.
From a regional perspective, international developed market stocks lagged the US but showed signs of promise as vaccinations accelerated and restrictions on social and economic activity softened. On the fixed income side, credit outperformed government bonds and speculative grade outperformed investment grade, with the longest-duration assets performing the strongest.
Asset Class Views
This document is for informational purposes only. It is not intended to provide financial or tax advice or to address all circumstances that might arise. Individuals and entities using this document are encouraged to consult their own financial advisor.
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