A Little Less Risk...

Acknowledging the near-term risks to the pace and sustainability of the economic recovery, we are: (1) reducing domestic equities and reinvesting the proceeds in fixed-income securities and, (2) modestly reducing the cyclical tilt of the domestic portfolio. Though we still believe that we will not lapse into a "double-dip" recession, the recent deterioration in employment, housing, manufacturing, leading economic indicators and a host of other economic data has diminished our confidence to some degree. That said, this tactical asset allocation move may ultimately be reversed in September or October if it appears that third quarter earnings and/or the November election are going to provide a catalyst for domestic equities. 



Asset Allocation: Increasing our commitment to fixed income (bonds) brings our target allocation for this asset class to "neutral." A neutral weighting suggests the midway point between the minimum and maximum that is permitted by each client's guidelines. With small-cap and international equities also carrying neutral targets, large-cap equities are currently the only asset class that we continue to modestly "overweight." (please see chart below) 


Sector Strategy: Given the strong year-to-date performance and the somewhat extended valuations, we are taking some profits in the industrial and consumer discretionary sectors. The proceeds from these sales will be reinvested in utilities, healthcare and financials. The net result of the aforementioned moves increases the dividend yield and reduces the cyclical risk of our client portfolios.

Fixed Income: A slow growth environment increases the likelihood of a second quantitative ease by the Fed. Such a move would mean a large purchase of Treasuries. Though rates have already come down sharply due to the large amount of money in the system, injecting even more money into the system would suggest that even lower rates are likely ahead. With this in view, not only are we committing more capital to fixed income, but we are also increasing the duration of our portfolios to match that of the respective benchmarks. This move reflects our belief that interest rates will remain lower … longer.