Wrought Rebalance

Key changes:

• Reduce equity overweight to 1%; seeking to tactically preempt seasonal and potential election-related volatility, with an eye toward potentially re-risking post-election

• Neutralize regional equity tilts, moving closer to benchmark weighting across US, Developed Market, and Emerging Market stocks amidst shifting relative trends in corporate earnings

• Recalibrate tech and growth/value factor bets, maintaining a growth bias but tactically pruning exposure following significant outperformance and rising short-term macro uncertainty

• Harvest gains on ‘inflation fade’ and duration-sensitive trades in bond-heavy risk profiles, adjusting fixed income sleeve positioning after a sharp fall in interest rates and in preparation of a regime transition to Fed easing

Our Take:

As the undercurrents driving many successful YTD market themes lose momentum, we're battening down the hatches with a three-percent reduction to our equity overweight, a surgically timed move to more nimbly navigate the choppy waters that have historically characterized the final act of election season.

This tactical adjustment stems from a confluence of factors. Our systematic analysis of earnings surprises and estimate revisions has detected cooling trends, suggesting at least some potential moderation of the earnings-fueled advantages that catalyzed such narrow market leadership the last 18 months. Our research also reveals the autumn period from mid-September through early November in presidential election years has tended to be more volatile than usual, with increased vulnerability to sharp downside moves.

The elevated uncertainty surrounding the upcoming election adds additional complexity that is difficult to handicap. Given the sharp divide in the parties’ expected policy and the expectations of a close race, many real economy actors are delaying major capital allocations and business-defining bets to after election night. In this state of uncertainty any lack of liquidity has the potential to trigger significant market fluctuations and is compounded by the chance of delays or prolonged uncertainty about the outcome.

Recent changes in market temperament have also caught our attention and give us pause. A relatively tranquil melt up in mega cap stocks the first 6 months of the year was disrupted by history-making single-day selloffs, rotations, and V-shaped snapbacks, telltale signs of a market more susceptible to headline-induced downdrafts.

Despite the recalibration of our portfolio, we're not abandoning ship. Looking beyond the immediate horizon, our medium-term outlook remains cautiously optimistic, with a view that recession odds remain low. Accordingly, we're maintaining our preference for stocks over bonds and many of our long-favorited tilts, albeit with a reduction in magnitude. This positioning allows us to stay engaged with and exposed to market upside while giving us the flexibility to be opportunistic. By tempering our exposure now, we're not just playing defense but setting the stage to potentially capitalize on the opportunities that frequently emerge in the wake of uncertainty.