Easy Does It
The continued economic expansion, the fluidity of global politics, and the shifting tectonics of monetary policy: All are reasons we think staying invested, but staying focused on alpha and on risk, is the appropriate path. Markets strike us as lacking extremes on either end of the valuation continuum, though they are subject to rising risks, including the potential for recession, flareups of volatility, and political shocks. Easy Does It, in our view, is the appropriate mindset in a climate that calls for a risk-aware adherence to strategic investment allocations.
We see current conditions as largely benign as long as investors understand that risk may no longer be linear. Political shocks and policy-related risks are the variables to watch, whereas we see recession risk as still moderate.
Investors who believe in risk assets but think they offer limited upside from this point forward may revisit strategies with the potential to offer equity-like returns, but with less equity-like beta. In our view this means examining a range of possibilities in income-oriented investing and alternatives. It may, in short, mean adopting an Easy Does It philosophy—seeking to optimize risk in the tenth year of an equity bull market.
Consequently we would emphasize:
- Sticking to the plan, by maintaining strategic asset allocation weights
- Alpha-oriented, bottoms-up strategies over pure equity beta
- Income-oriented investing and alternatives as a response to moderating returns
Macro & Market Views
Uneven global deceleration…
The recent slowdown in activity and growth has had at least two remarkable features: 1) its protracted length, and 2) the manufacturing sector's weakness, whose signal should not be over-emphasized as its share of US GDP is only 10%. Other parts of the global economy—notably the services sector—have been much more resilient in the face of uncertainty over trade policy and the associated disruption to supply chains.
Source: Haver and GSAM.
Seemingly divergent signals from stocks and bonds...
On the surface, exceptionally strong 1H 2019 equity market returns appear to contrast with the cautious signal of falling fixed income yields. The message may not be so mixed. Part of equities' strength reflected a rebound from 4Q 2018 oversold conditions, while low to negative rates reflect expectations for continued loose monetary policy.
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Source: Bloomberg and GSAM.
Top Section Notes: As of July 31, 2019. 'Global manufacturing PMI' refers to Purchasing Managers' Index, an index measuring prevailing direction of economic trends in the manufacturing sector. Bottom Section Notes: As of July 31, 2019.
Risk Disclosures
Equity securities are more volatile than fixed income securities and subject to greater risks. Small and mid-sized company stocks involve greater risks than those customarily associated with larger companies.
International securities entail special risks such as currency, political, economic, and market risks.
Emerging markets securities may be less liquid and more volatile and are subject to a number of additional risks, including but not limited to currency fluctuations and political instability.
An investment in real estate securities is subject to greater price volatility and the special risks associated with direct ownership of real estate.
Investments in fixed-income securities are subject to credit and interest rate risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline in the bond’s price. Credit risk is the risk that an issuer will default on payments of interest and principal. This risk is higher when investing in high yield bonds, also known as junk bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than their original cost upon redemption or maturity.
Although Treasuries are considered free from credit risk, they are subject to interest rate risk, which may cause the underlying value of the security to fluctuate.
There may be additional risks that are not currently foreseen or considered.
General Disclosures
Page 2 Relative Asset Class Calendar-Year Performance Notes: US Large Cap is represented by the S&P 500 Index. UK Equity by the FTSE 100 Index. Europe Equity by the MSCI Europe Index. Japan Equity by the MSCI Japan Index. Global Small Cap by the MSCI World Small Cap Index. EM Equity by the MSCI Emerging Markets Index. Global Agg Bond by the Bloomberg Barclays Global Aggregate USD Value Hedged Index. Global High Yield is represented by the Bloomberg Barclays Global High Yield Value Unhedged Index. Global Real Estate is represented by the FTSE EPRA/ NAREIT. EM Debt by the JPM EMBI Global Composite Index. Commodities by the S&P GSCI Commodity Index. Hedge Funds are represented by the HFRI Fund of Funds Index. Macro/Tactical Hedge Funds is represented by a 50/50 blend of the HFRX Macro/CTA Index and the HFRI Macro Index.
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