Global Conservative portfolio outlook, positioning, and attribution as of 09/30/2024

September 30, 2024

Outlook:

• We believe the global economy, and particularly the U.S., could maintain slow-to-moderate growth through 2024, but elevated market sentiment amid signs of slowing economic conditions also warrant caution.
• While the Fed and other central banks have begun monetary easing, the impacts of tight monetary policy could linger for some time, and we believe a sustained reacceleration to early-cycle growth remains very unlikely amid a cooling U.S. labor market and reduced tailwinds for consumers.
• The U.S. consumer remains on solid footing, but has limited capacity to accelerate spending from here, in our view, as the excess savings that fueled the post-COVID spending recovery is now effectively depleted and the personal savings rate has normalized around 5%.
• Softening U.S. employment trends, which have been percolating under the surface, have become more visible in the labor market data, in our view.
• We believe the Fed has flexibility to continue easing, given disinflationary trends, but the degree of rate cuts expected would still leave the real Fed Funds rate north of 1% at the end of 2025, and we believe materially sharper policy easing is unlikely absent significant economic weakness.
• Internationally, most major economies are slowing and still face late-cycle challenges. Japan is an outlier, in our view, with positive growth trends and relatively loose monetary policy. China, in contrast, continues to face deleveraging headwinds and has seen its growth rate drop below peers. In Europe, we see tight monetary conditions and slowing employment gains as ongoing risks.

Portfolio Positioning:

• In our view, the evolving late-cycle economic environment warrants a balance of exposures to defensive areas of the market as well as areas that should benefit if economic growth persists.
• In the U.S., we are overweight late-phase, defensive sectors that we expect can outperform as growth slows and avoiding several cyclical early-phase sectors, but have increased Financials exposure and added new Real Estate exposure that could benefit from continued economic growth and lower interest rates.
• We maintain a significant-but-underweight exposure to U.S. mid-phase sectors in aggregate, where valuations present risk, in our view.
• We are underweight Europe and emerging markets, but we maintain an overweight of developed Asia, where we see the greatest potential for economic resilience abroad.
• We maintain a moderate overweight of fixed income with an emphasis on longer-term Treasury securities, which we believe will benefit if interest rates decline, and shorter duration for corporate exposure to reduce risk from a potential widening of credit spreads.

Q3 Attribution