US economy: Still growing, but slowing

At this time, we believe the US economy is experiencing a late-cycle expansion, not a recession. If the US economy does enter a recession, we would likely seek to further de-risk managed accounts. This may mean further reducing exposure to stocks and adding exposure to bonds.

Silicon Valley Bank appears to be an isolated incident

On March 10, regulators closed Silicon Valley Bank (SVB), which was the 16th largest bank in the nation. We believe the situation with SVB was unique, rather than a sign of systemic issues with the broader US financial system. Large and other mid-sized banks do not appear to be facing the same issues as SVB.

In addition, the US government has rolled out a plan to protect depositors at SVB as well as other banks across the country. Most of our well-diversified managed accounts had very little exposure to SVB, as it made up less than 0.02% of the Dow Jones US Total Stock Market Index. This is an example of why diversification is a critical part of how we help manage risk for our clients.

Our latest thinking on the economy

After a market rally through the end of 2022, the stock and bond markets have experienced a high level of market volatility in February, as the US economy and corporate profit growth have been slowing.

The late-2022 rally isn’t all that unusual, because historically, stocks and bonds have typically risen in value during late-cycle expansions.¹ That’s why we’ve been disciplined about maintaining exposure to assets like stocks, commodities, and high-yield bonds, even when news headlines have been challenging.

Despite recent positive returns, we do not believe that the risk of a US recession has entirely gone away. Therefore, we have continued to reduce the level of risk within well-diversified managed accounts. We’ve done this by reducing our exposure to US stocks and high-yield bonds, and adding to high-quality bonds instead, which have historically performed better during most periods of stock market volatility. We also remain well-diversified across US stocks, non-US stocks, bonds, commodities, and alternatives. We believe this level of diversification may help reduce the level of volatility within client accounts during the late-cycle expansion.

As to the risk of a recession, a significant part of our rigorous research process is dedicated to closely monitoring the health of the US economy. In this environment, we are closely following the job market, the outlook for corporate profits, inflation, and interest rates. We also research geopolitical developments to assess their potential impact on the US economy. This approach gives us the confidence to manage the risk level within our managed client accounts as the economic backdrop evolves.

Though we believe the US economy is continuing to experience a late-cycle expansion, if the US economy does enter a recession, we would likely seek to further de-risk client accounts. But just as importantly, we would diligently use our research to uncover opportunities to add stock exposure back to client accounts. That’s because stocks have historically started to recover before recessions have even ended. Not only that, but stocks have historically experienced many of their strongest gains in early-cycle recoveries following recessions.²

How we continue to position Portfolio Advisory Services managed portfolios

Total return

As we move through late-cycle expansion, we continue to take steps to help manage risk within well-diversified managed accounts. We also rebalance accounts in an effort to keep them in line with the goals and preferences of our clients.

• US and non-US stocks
  • Reduced exposure to US stocks. Maturing business cycles have historically led to more bouts of market volatility.
  • Slightly increased exposure to non-US stocks, as we believe they appear relatively inexpensive and may benefit from China’s reopening from strict COVID-19 measures.
  • Exposures to different disciplines (growth, value, etc.) are near their benchmark targets, as we are emphasizing core managers who favor stocks with relatively stable earnings.
• Bonds
  • Added to high-quality bonds, particularly investment-grade bonds. In general, bonds now offer compelling yields³ and have tended to experience less volatility than stocks over time.
  • Reduced exposure to high-yield bonds. We believe these investments may experience more volatility as the business cycle matures.
• Commodities, real estate, and alternatives
  • Increased positions in commodities since these investments have historically held up well during periods of higher inflation.
  • Sold out of real estate exposure as they have historically experienced more volatility during late-cycle expansions.
  • Maintained exposure to alternatives in some accounts. We believe these types of investments can provide returns that are less correlated to traditional stocks and bonds.
• Tax efficiency
  • Managed for tax efficiency in taxable accounts that apply tax-smart investing techniques,⁴ particularly through tax-loss harvesting during periods of stock market volatility.

Defensive

The defensive portfolio strategy continues to temper volatility during market drawdowns. As always, this portfolio remains defensively positioned. We continue to rebalance portfolios to help ensure risk and return potential remains aligned with client goals and preferences. We also manage for tax efficiency in portfolios where taxes matter.

• US and non-US stocks
  • Slightly reduced exposure to developed low-volatility international stocks in favor of low-volatility emerging market stocks, which may offer favorable risk-adjusted returns.
  • Shifted some exposure away from higher dividend-paying US stocks to low-volatility US stocks, which we believe may increase defensiveness through diversification.
• Bonds
  • Increased both exposure to US Treasury bonds and broad-based investment-grade bonds. We believe these investments may provide diversification benefits and may offer attractive risk-adjusted returns through active management.
  • Maintained a significant allocation to US Treasury Inflation-Protected Securities (TIPS). These investments tend to provide protection during periods of rising inflation.
• Alternatives
  • Reduced exposure to alternative investment strategies in favor of Treasury bonds and broad-based investment-grade bonds.

Make a plan, stick with it, and stay invested

Market conditions can change quickly. Historically, the market has sometimes rallied even as news headlines may have felt discouraging. Despite the rising risk of recession, we want our managed account clients to benefit from market rallies like the one that took place at the end of last year. As a result, we maintain healthy exposure to stocks even through bouts of market volatility. Over time, well-diversified, multi-asset portfolios have generally experienced less volatility than stock-only portfolios. And they have significantly outperformed short-term investments over the long run. That’s why we believe that getting invested and staying invested can help our clients reach their financial goals over the long term.