As we noted last month, a setback in stock markets feels overdue, but we continue to feel that the opportunity cost of attempting to position for it – the possibility of missing an ongoing rally or a quick rebound – could be significant.
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The S&P500 may have hit a new all-time high, but stock valuations are far from theirs, and we see no reason why stock prices should fall and stay down. In contrast, bond valuations are close to all-time highs, and are very sensitive to changes in interest rates. We advise a strategically underweight position in government bonds (and a tactical underweight in investment grade credit). We stay tactically neutral in the diversifying asset classes of commodities, real estate and ATS.
The S&P500 may have hit a new all-time high, but stock valuations are far from theirs, and we see no reason why stock prices should fall and stay down
We are not inclined to use the weakness in commodity prices in particular – especially gold (see essay below) – as an opportunity to add to our tactical weightings: a growing global economy is no guarantee of higher commodity prices, and the monetary claims made for gold have always looked overdone.
Figure 1: Current strategic (SAA) and tactical (TAA) asset allocation by risk profile
Figure 2: Total returns across key global asset classes