Portfolio Construction in a Time of Known Unknowns

You know it’s a difficult time to be a portfolio allocator when the most oft-cited piece of investment advice for some time has been to allocate to cash and wait until conditions improve. And given the environment of persistently high inflation, aggressive central banks, recession fears, and a persistent question of “What breaks when rates are this high for this long?” (the financial industry’s version of a “Known Unknown”), it makes sense.

• Richard Brink, Chief Market Strategist

Summary

• Q1 2023: Second consecutive quarter for strength and risk assets. He had said in previous sessions of his to be on the lookout for 2 inflection points that would bring a decent amount of returns. The first being when the fed indicated that they were nearing the end of their tightening cycle, which we saw in the end of the 4^th quarter of last year.
• Even thought the returns were strong, it was separated into 3 different chapters with the direction of rates being the center of everything.
• The fed became more aggressive in January in February in language because the market wasn’t doing its job of reacting to the fed, but in March it found a new partner in the form of tightening and lending.
• The expectation of growth is flat for the year. Inflation is coming down over 2023 but still over the fed target. 2024 is what he is focusing on with the expectation for growth being 2.5%.
• Historically we have benefited from strong average market returns. If you look at the takeoff point of the S & P 500 takeoff, that is the point where the fed fund rates were highest. As rates fall, we get big returns.
• Strong market returns from 2019-2020 were not reflective of fundamental growth, but rather were driven by fiscal and monetary support.

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