In our February blog we identified potential “circuit breakers” that we thought could bring relative calm back to the market. At that time, we believed that the most important change would be if the Fed moved to adopt a more dovish policy. In March, the Fed delivered.

Going back to last year, our view has been that the Fed’s attempt to tighten monetary policy was the key driver of uncertainty and volatility in the markets. As we look ahead into the second quarter, we expect that the Fed’s more accommodative stance will help to calm markets over the near term.

That said, our macro regime framework continues to indicate that most of the global economy remains in the “slowdown” regime, which typically foretells mediocre asset returns and significant uncertainty. The most recent data confirms that Europe has continued to decline. In the U.S. we see signs of improvement, as the inventory overhang abates while new orders in manufacturing improved sharply in the latest Institute for Supply Management (ISM) survey. If this trend continues, the U.S. could re-enter the expansion phase in the next month or two. Finally, China, which has been in “contraction” for several months, continues to stabilize.

With these developments in mind, we have sharpened our pencils to identify attractive opportunities that we believe can deliver in this environment. The most compelling opportunities we see are in credit, both high yield and investment grade. You may remember that we sold our high yield exposure last fall, at a time when we believed credit would underperform as volatility picked up. And spreads did sell off, to near recession levels over the last few months. Today, with more attractive valuations and a belief that volatility will stabilize, we believe credit offers an attractive opportunity to capture returns versus equities while incurring less risk in the portfolio.

Over the course of the last month we have also added to our investment in emerging markets equities. In emerging markets we see attractive valuations, signs of economic improvement and technical resilience during the recent sell-off as positive indicators going forward.

Overall, our view regarding positioning for a 60/40 investor remains modestly defensive, with an overall underweight to equities of about 5%. The key changes from last month are as follows:

  • Slightly overweight emerging market equity.
  • Reinitiated exposure to high yield credit.
  • Increased Treasury duration target to long 0.5 years versus benchmark1 to offset some of the increased risk from adds to emerging equities and high yield.

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1 The Fund’s benchmark consists of 60% MSCI ACWI/40% Barclays Global Aggregate Bond Hedged USD. The MSCI ACWI is a free float-adjusted market-capitalization-weighted index that is designed to measure the equity market performance of developed and emerging markets. The Barclays Global Aggregate Bond Hedged USD is an index comprised of several other Barclays’ indices that measure fixed income performance of regions around the world while hedging the currency back to the U.S. dollar. Indices are unmanaged and cannot be purchased directly by investors. Index performance is shown for illustrative purposes and does not predict or depict the performance of any investment. Past performance does not guarantee future results.