March 25, 2022 — An important discipline in our investment work is portfolio risk management. This can mean adjusting position sizes of securities, adding portfolio hedges, or recognizing that the market is not appropriately pricing risks to the upside or downside. There is no question that economic risks have risen significantly in recent weeks, yet the S&P 500 is less than 6% below its all-time high. While we are not projecting a recession over the next 9–12 months, the downside risks have sufficiently escalated to no longer warrant an overweight to U.S. equities. As a result, the Investment Committee has exercised risk management by reducing U.S. large-cap and small-cap equity exposure to neutral versus our strategic benchmark and adding the proceeds to investment-grade fixed income and cash. We retain a small overweight to equities via emerging markets.
Three important, interrelated risks have escalated of late—all of which the market seems to be shrugging off—and will be further explored in our April Capital Perspectives:
Figure 1: Consumer sentiment declining in the face of inflation
Data as of March 16, 2022. Sources: University of Michigan Consumer Sentiment Survey, WTIA.
Prudent investing is not about predicting the future and placing all eggs in that basket. Instead, it’s about recognizing risks, estimating what is priced into the market, and positioning accordingly. We assess that risks have risen dramatically without a symmetric price response in the market, thereby giving us an opportunity to reduce portfolio risk into relative strength. The good news is that the economy is entering this year on very solid footing, with significant cushioning to withstand these risks. A recession is not our base case, but we expect a slowing of growth from our original 2022 U.S. GDP forecast of 3%, and this will impact corporate earnings.
We still retain a modest overweight to equities via emerging markets, where prices have been beaten down, sentiment is very negative, and currencies are arguably undervalued relative to long-term equilibrium. A pivot from China toward more supportive fiscal and monetary policy, along with a more favorable outlook for commodity exporters, is expected to support returns for the asset class relative to developed markets equities. While we retain an underweight to investment-grade fixed income, Treasuries and aggregate bonds have experienced one of the largest drawdowns in history, making this an attractive time to begin adding back to the asset class. This action modestly reduces the degree of our underweight versus our strategic benchmark. We also hold an overweight to cash, which has proven its worth in a highly volatile market and is also expected to benefit from the sharp move higher in short-term interest rates.
Please stay tuned for more details on our outlook and the global investment landscape, which will be discussed in our next issue of Capital Perspectives, due to be released the first week of April.
Facts and views presented in this report have not been reviewed by, and may not reflect information known to, professionals in other business areas of Wilmington Trust or M&T Bank who may provide or seek to provide financial services to entities referred to in this report. M&T Bank and Wilmington Trust have established information barriers between their various business groups. As a result, M&T Bank and Wilmington Trust do not disclose certain client relationships with, or compensation received from, such entities in their reports.
The information on Wilmington Wire has been obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed. The opinions, estimates, and projections constitute the judgment of Wilmington Trust and are subject to change without notice. This commentary is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or a recommendation or determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on the investor’s objectives, financial situation, and particular needs. Diversification does not ensure a profit or guarantee against a loss. There is no assurance that any investment strategy will succeed.
Past performance cannot guarantee future results. Investing involves risk and you may incur a profit or a loss.
Indexes are not available for direct investment.
Reference to the company names mentioned in this blog is merely for explaining the market view and should not be construed as investment advice or investment recommendations of those companies. Third party trademarks and brands are the property of their respective owners.
Basis points refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01%, or 0.0001, and is used to denote the percentage change in a financial instrument.
S&P 500 index measures the performance of approximately 500 widely held common stocks listed on U.S. exchanges. Most of the stocks in the index are large-capitalization U.S. issues. The index accounts for roughly 75% of the total market capitalization of all U.S. equities.
What can we help you with today