April 19, 2023
Late-cycle
investing
Investors today face no shortage of challenges, with the signs increasingly suggesting a late-cycle environment. To help navigate these uncertainties, we’ve put together a collection of actionable ideas on how to proactively respond to the market’s most pressing issues.
Post pandemic, rising inflation contributed to a meaningful economic slowdown
YoY change in the Composite Index of Leading Indicators (LEI) vs. inflation (consumer price index), in %
Source: The Conference Board, as of 5/31/23. The Composite Index of Leading Indicators (LEI) is published monthly by The Conference Board and tracks 10 economic components whose changes tend to precede changes in the overall economy. The Consumer Price Index (CPI) tracks the average change of prices over time by urban consumers for a market basket of goods and services. It is not possible to invest directly in an index. YoY refers to year over year. Past performance does not guarantee future results.
Earnings estimates for S&P 500 companies have been choppy over the past few quarters
Source: FactSet, as of 6/30/23. The S&P 500 Index tracks the performance of 500 of the largest publicly traded companies in the United States. It is not possible to invest directly in an index. Earnings per share (EPS) is a measure of how much profit a company has generated calculated by dividing the company’s net income by its total number of outstanding shares. Past performance does not guarantee future results.
Yields are significantly higher—and the curve is now inverted
10-year U.S. Treasury yields (%)
Source: U.S. Department of the Treasury, as of 6/30/23.
The unemployment rate has been a consistent bright spot
U.S. unemployment rate (%)
Source: U.S. Bureau of Labor Statistics, as of 6/30/23.
What to do now
There’s no shortages of challenges in today’s markets, but that doesn’t mean you need to sit on the sidelines. Below we highlight three investment themes worth considering and some strategies you can use to incorporate them into a diversified portfolio.
Focus on the quality factor
With mounting uncertainty in the stock market, consider rotating into offerings that focus on quality in those segments that may be experiencing heightened volatility. Why quality? History's shown that companies with more durable earnings are better equipped to weather an economic downturn.
Consider high-quality and tax-exempt bonds
Pivoting to emphasize high-quality fixed-income positions during this phase may prove prudent. We believe mortgage-backed securities, investment-grade corporates, and diversified tax-exempt offerings are particularly attractive in today's market. With compelling yields across the bond market, now may not be the time to be overexposed to risky assets.
Pursue enhanced diversification
Consider increasing exposure to investments that pursue alternative approaches and offer low correlations to stocks and bonds. There are a number of ways to reduce overall volatility through an allocation to alternatives, and a lower risk profile in turbulent markets is typically a prudent move.
Important disclosures
Diversification does not guarantee a profit or eliminate the risk of a loss. Correlation is a statistical measure that describes how investments move in relation to each other, which ranges from –1.0 to 1.0. The closer the number is to 1.0 or –1.0, the more closely the two investments are related.
Related viewpoints
April 4, 2023
Is the Fed as dovish as the market thinks it is?
March 30, 2023
Portfolio Intelligence podcast: have bank fears upended the investment outlook?
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