Prior cycles

As always, the problem with these types of “performance during tightening cycle” analyses is that all else is not remotely equal in each period/example. Valuations differ, central bank reaction functions can vary, plenty to confound a clean analysis.

Otherwise, you might look at the below and think “the run pre-tightening might have been too much, but the fall since puts it in the middle of the pack out prior outcomes”, and position perhaps a little more aggressively with regard to growth allocations.

Hence it is difficult to know what to make of them in moments like now. 

Likewise, normally, you’d look to the below, and conclude the dreaded steepening (as opposed to a benign one) is about to occur, indicating a recession is upon you as the Fed cuts rates below longer-dated ones, and hence you’d likely look to make some defensive trades prior.

We did, fractionally, across our multi-asset funds, selling some Australian shares, buying credit, and stepping down the efficient frontier a little.

The USD was perhaps the more actionable one of the lot, signaling that perhaps it had run “too far”. We bought a little hedged international shares, not wanting to see a stronger AUD eat all the ex-ante returns; again, these are trades at the margin.

Everything is a little “low conviction” at the moment. My preferred phrasing is “strong opinions, weakly held”.

The one fairly unambiguous area of success has been the speed of the recovery, which contrasts well against the jobless recovery and “lost decade” of 2009 onwards.

Policymakers can be proud, and constituents can consider whether a little extra inflation resting on many shoulders was better than unemployment weighing on fewer shoulders.

Overall, the path to a soft landing is narrow, but the Fed, and central banks globally, seem to be on it. The key will be whether they can remain so, given that policy works with long and variable lags.

We are sticking fairly close to our strategic weights, choosing not to over-allocate to any one market, region, style, asset or sub-asset class. 

We’ve got a mix of credit, floating rate securities and medium levels of duration across our fixed income exposures, and within equities we’ve maintained a modest tilt towards value, both in the managers we select and in the geographic tilts we target.

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