This is a very uncertain time for both the economy and the investment market, especially given where we are in the Fed’s rate hike cycle and waiting to see what could come next for monetary policy. The economy is sending mixed signals but generally suggesting a slowdown. Earnings are holding their own, while recession fears and the interest-rate-driven rally in large-cap “mega-tech” has driven valuations in large-cap stocks back up to historically high levels. We continue to believe there is relative value (for patient investors) in U.S. small caps and non-U.S. markets.

This uncertainty has two explicit implications for advisors and investors:

1. A growing need for diversification within the portfolio.

2. A re-emergence of active management (or non-cap-weighted beta) within the portfolio. This is a time when advisors and investors have the potential to add real value in their asset allocation, portfolio construction and security selection decisions.

Based simply on the data, this is a cautiously “risk-off” investment environment. We believe in being fully invested over full market cycles, but now may not be the time to be taking overly aggressive active risk bets. The inverted Treasury yield curve suggests short-term floating rate Treasuries may be a reasonable place to “hide” until the fog clears.

Current Strategic Asset Class Positioning and Outlook

Source: WisdomTree, as of 5/25/23. Evaluations are subject to change as market conditions change. This is for illustration purposes only and does not represent investment advice. All evaluations are on a relative and not absolute basis. Red = a negative relative evaluation; yellow = a neutral relative evaluation; green = a positive relative evaluation. You cannot invest in an index, and past performance does not guarantee future results.

Asset Allocation Guidelines

+ We have a neutral stance on stocks versus bonds for the remainder of 2023.

+ In equities, we remain roughly in line with the MSCI ACWI Index in terms of our regional exposures to the U.S., EAFE and EM (i.e., roughly 60% U.S. and 40% non-U.S.). Our EAFE allocation has worked well for us this year.

+ We have a modest over-weight in small-cap stocks in the U.S., EAFE and EM. While this trade has not been in favor in recent weeks, we think the relative valuation opportunity presented by small caps should be beneficial for patient investors.

+ Growth stocks dominate current market performance, and our embedded “tilts” toward value, size and dividends have not helped us this year (after dramatically outperforming in 2022). We also believe quality (companies with stronger earnings, cash flows and balance sheets) will become an increasingly important factor as recession fears and market uncertainty rise.

+ Within fixed income, we continue to slightly favor shorter duration and an over-weight in credit, with an emphasis on quality security selection. We continue to see opportunities in floating rate Treasuries as a way of accessing income without the volatility and high-yield corporate credit given the yield cushion currently offered.

+ We are neutral on the broader commodity complex due to a slowing global economy. We reduced our exposures within our Model Portfolios accordingly.

+ We continue to see value in alternative investment allocations for investors seeking to increase overall portfolio diversification and add in additional potential relative return drivers.

+ Generating relative and absolute returns will be key in 2023—that is, we believe the remainder of 2023 will present opportunities for advisors and investors to focus on “alpha generation” and not simply “beta wave” performance. Expectations for returns from traditional assets remain muted, given current rates, spreads and valuations and the ability of traditional diversified portfolios to achieve desired objectives. We are not bearish on the markets—we simply are uncertain this is the time to be taking overly aggressive active bets.