Multi-Asset portfolio outlook, positioning, and attribution as of 06/30/2024

June 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.
• A sustained reacceleration to early-cycle growth remains very unlikely, in our view, as the tight labor market and slowing disinflation reduce tailwinds for U.S. consumers.
• The labor market has supported growth in the U.S., and headline job gains remain positive, but the participation rate has recovered to near pre-COVID levels and job openings are declining, making for further improvement challenging, in our view.
• Consumers have remained resilient, but the COVID-era savings cushion is essentially depleted and the savings rate is back near historic lows, leaving consumer spending growth more reliant on income growth, in our view, which may be at risk if payroll and wage gains slow.
• We believe the Fed has flexibility to manage real interest rates lower given the moderating absolute level of inflation, supporting a pullback in Treasury yields, but the 45 basis points of cuts expected in 2024 would still leave monetary conditions tight, and materially sharper policy easing is unlikely absent significant economic weakness and credit spreads could widen.
• Internationally, Europe is facing a weakness in household consumption and investment, along with tight monetary conditions and less of a savings cushion than the U.S., and China’s growth remains anemic due to negative wealth effects and deleveraging, but Japan is a relative bright spot, as its inflation recedes while stimulative monetary policy remains in place.

Portfolio Positioning:

• Given our outlook for slow-to-moderate economic growth with risks from fundamental headwinds and sentiment, we are underweighting or avoiding the most economically sensitive assets, such as equities, real estate, and broad commodities, though we do see opportunity for diversification and appreciation from exposure to gold in the current environment.
• Within U.S. equities, we are emphasizing mid- and late-phase sectors that we expect will see less deceleration in earnings as economic growth slows, such as Communication Services and Health Care, while largely avoiding early-phase cyclical U.S. sectors, though we hold opportunistic exposure to Financials, which we be believe could benefit from easing financial conditions and a rebound in capital markets activity.
• We remain underweight to international equities, as a whole, including underweights of Europe and emerging markets, but we maintain an overweight of developed Asia, where we see the greatest potential for economic resilience abroad.
• Within fixed income allocations, we are emphasizing intermediate and longer-term Treasury securities that should benefit if interest rates decline, and we have shortened the duration of corporate exposure to reduce risk from a potential widening of credit spreads.

Q2 Attribution