Key Investment Perspectives: September 2019
Our September edition of Key Investment Perspectives examines market conditions in the month of August, with a focus on the growing talk of recession and the increased emphasis on risk aversion among investors.
In short, August was a highly volatile month: On August 14, the 10-year Treasury yield briefly fell below the 2-year Treasury Note yield, and equity markets moved sharply lower. An inverted yield curve has been shown to be a reliable indicator of an economic slowdown, and fears of a recession began to mount.
We do not believe a recession is imminent, although we do believe a balanced risk posture is prudent. In this month’s issue, we discuss:
- The research supporting our outlook.
- Why the low unemployment rate is a silver lining.
- Our perspective on the impact of trade conflicts on the domestic and global economies.
- The performance of domestic and international financial markets and major asset classes in August.
Importantly, we address our current tactical asset allocation recommendations drawn from our rigorous analysis of market conditions and prospects.
- Global Equities: Performance of US and developed markets ex-US equity styles and sectors followed what would be expected in a typical risk-off month: Defensive segments outperformed more cyclical segments. In the US, large cap (-1.8%) outperformed small cap (-4.9%) while large cap growth (-0.8%) outperformed large cap value (-2.9%). Developed international markets were down 2.6%, slightly underperforming the US (-2.0%). We remain underweight developed markets ex-US equity relative to the US.
- Fixed Income: The biggest story in August was the Barclays Capital Long US Treasury Index. The index was up 10.5%, making it the fourth-best monthly return in the index’s history dating back to 1973. While the three higher-performing months all occurred during a recession, we believe this time is different. We continue to maintain a neutral duration within our Treasury portfolios and remain underweight high-yield bonds in favor of higher-quality investment-grade issues.
- Tactical Allocation: Since the beginning of 2019, we have been signaling an increasingly defensive stance. First, we increased our exposure to the US at the expense of international markets. Later, we moved from a short-duration positioning within our fixed income portfolios to a neutral stance. Then we added a sizable amount of low-volatility exposure with our US equity portfolios. Finally, in early August, we moved our stock vs. bond allocation from a slight overweight in favor of stocks to a neutral stance. We continue to recommend a defensive stance.
About Bola Olusanya
Bola Olusanya has more than 20 years experience in investment management as both an executive and thought leader. As Managing Director of Asset Allocation and Portfolio Strategy with Key Private Bank, Bola applies his expertise to direct Key Private Bank’s third-party manager research efforts, oversee the group’s portfolio construction efforts, and design an asset allocation methodology applicable to all stakeholders.
Bola received an MBA with a concentration in finance from Emory University and an MS in computer science from the University of Lagos. He is known for his quantitative expertise, his extensive knowledge of the full spectrum of asset classes, and his ability to mentor and manage high-performing investment teams.