As we prepare for a return to higher volumes and more active market activity after the summer slowdown, we would like to take the time to review our stance on portfolio strategy.
At the present juncture, the macro-economic backdrop is not as attractive as even a few months ago. The convergence of inflationary pressure alongside an emerging slowdown of economic activity due to the new Delta variant are not positive elements for a continued and smooth expansion of valuations. On the interest rate front, we also wait for more information from the Fed which should provide highlights of their thinking during the upcoming Jackson Hole conference.
All in all, risk appetite has diminished as valuations have increased and the future outlook has become cloudier. This backdrop should produce more range bound action which would require portfolios to be more dependent on income and security selection than pure Beta exposure (or the exposure to general market trends).
Inflation hedges should remain in place as it is unclear if the current pressures are just temporary or if price increases are here to stay. Commodities overall should continue to outperform albeit within volatile conditions.
We would also like to offer a statistical tidbit on the S&P 500. Last Friday, the index hit the 200th day without a 5% or more correction. It is not very common to experience such positive streaks and in fact this has happened only eight times before since the 1950s. Performance following such streaks has been generally subdued for the next 12 months but extremely positive in the next 2 and 5-year periods with an average return respectively of 27.4% and 64% (source: Mark DeCambre, www.marketwatch.com).