Market Returns

A global portfolio is likely to return only 5.3% a year over the next decade, compared to 6.7% in the past. Investors either need to lower their return expectations, or take more risk. Our total return methodology remains consistent with previous editions, with changes limited to the Alternatives section.

In part 2 of this series, we discuss mainstream EM equity valuations and present the results of our cross-country analysis. The goal is to identify overweights and underweights within an EM equity portfolio.

The next six-to-nine months hold a crucial test of whether the equity market will ratify the soft landing and the Biden administration or not. If so, then markets will rally on policy continuity and likely gridlock. If not, then markets will struggle until the election is over and again in 2025-26.

The next six-to-nine months hold a crucial test of whether the equity market will ratify the soft landing and the Biden administration or not. If so, then markets will rally on policy continuity and likely gridlock. If not, then markets will struggle until the election is over and again in 2025-26.

High-Yield municipal bonds have performed well in recent years, but valuations are now stretched. We recommend an underweight allocation, though we prefer high-yield munis over high-yield corporate bonds.

While excellent state & local government balance sheet health will remain a tailwind for muni returns, poor valuation prompts us to downgrade the sector from overweight to neutral.

Stocks fare best when there is plenty of slack in the economy and growth is strong and getting stronger. The good news is that the economic growth score for the US in our MacroQuant model is above its historic average. The bad news is that US economy is operating with little slack and sentiment is getting complacent. We recommend that investors maintain a modest overweight to equities for the time being but look to get more defensive later this year or in early 2024.

We build a four-stage business cycle framework based on economic growth and capacity utilization, and then analyze historical returns for most major asset allocation decisions for each stage. Given that we are in the early recession stage (negative growth coupled and an overheated economy), our framework recommends a defensive positioning across all asset classes.

This week’s report examines three potential catalysts that could push Treasury yields meaningfully higher within the next few months. We also consider the rebuild of the Treasury’s cash holdings and its implications for the Fed’s balance sheet policy and financial markets.