Conquest

Central Bank all in to fight inflation Markets signal inflation to fade Rates to push higher still Policymaker credibility key to fight Valuations more attractive. We remain cautious based on incoming data and enter the final quarter underweight risk assets.However, policy priorities seem to be having some positive effect on expected inflation, despiteupsetting financial markets. This is a difficult and complex environment, and we continue to followour tactical discipline in navigating a very unusual year. While we are not out of the woods yet,valuations are becoming better as are longer-run expectations for returns.

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The economy is either in recession or booming. This is what the headlines are telling us each week. So, against this muddled stream of seemingly conflicting and contradictory information, we look for signs regarding which way we are headed. Consider the following evidence for the “recession” case and the “boom” case.

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Set against a backdrop of rising inflation and interest rates, calls for a “technical recession” are growing. Our check of the data leads us to maintain our near-term, tactical “underweight” to stocks. However, the correction in stock prices contains a silver lining as valuations have become better, boosting long-run return expectations.

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A sharp rise in interest rates catches the bond market by surprise and creates a challenge for the bull case for stocks. This week, we look at how rising rates are shaping the outlook.

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The first quarter brought a surge in inflation and war in Eastern Europe. This environment imposes a new reality on investors and policymakers. In this report, we discuss what is happening and how our top-down portfolios are positioned now.

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Our process for tactical asset allocation involves assessing data. Specifically, we assess month-to-month trends in data. When Russia began a full-scale invasion of Ukraine in late February, most of the trends we follow seemed poised to bounce. Obviously, this is no longer the case. This week we assess how recent data is influencing our outlook.

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The Changes at Hand

The stock market is near $50 trillion in value, about $15 trillion greater than before COVID-19. Stock values rose far faster than bonds, market earnings forecasts are hitting new highs, and companies are finding it easy to borrow. Yet there are signs that this happy situation could be poised to change. This week, we look at some recent evidence to support this claim.

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Viewpoint 2022

We publish this year’s Viewpoint 2022 amid ongoing recovery from an unprecedented pandemic. Signs of continued growth are apparent despite new COVID-19 variants and anticipated policy shifts. Long-run return expectations fall this year in as valuations and profit margins are elevated for stocks. For fixed income investors, surging inflation and expectations for rising rates are of primary focus.

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Despite an ongoing economic recovery and bull market in stocks, we see a growing set of reasons suggesting some caution may now be warranted. In this week’s commentary, we will lay out these reasons and offer some ideas for navigating more challenging market environments.

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After an initial strong run, signs of stress may now be emerging in the global recovery. Moreover, we note that financial markets appear priced for strong growth, record profits, and limited financial stress among corporate issuers. Given this backdrop, we now tactically reduce equity exposure to neutral following fourteen months of significantly overweight equity exposure.

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Amid an otherwise positive backdrop, supply shortages, uncertainty over economic policy, and high valuations for financial assets are apparent. We remain tactically overweight stocks, but reduce exposure, shifting somewhat toward bonds. This report addresses how WCA tactical portfolios are positioned now to address short and longer-term factors.

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We discuss the recent record-breaking rally, what is driving it, and the potential impact of higher prices on future returns. Also considered is the impact on wealth and appropriate portfolio strategies are suggested.

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Downshift

A slowdown in business spending and concerns about slowing employment and services add new challenge to growth story. Our near-term forecast of conditions weakens somewhat, causing us to tactically reduce equity exposure from a large overweight to a small overweight in tactical portfolios.

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This week, the Federal Reserve meets to decide on interest rates. Most expect no change in rates, but inflation worries are leading to calls for the Fed to ease off the monetary throttle. The debate centers on whether recent inflation signs are permanent or transitory. The causes of today’s inflation may be linked to bottlenecks, federal spending, or a sharp rise in the money supply. Whatever the reason, the debate is likely to shape policy and market returns. Evidence of Inflation’s Return Inflation is the change in purchasing power of money, reflected in prices. The consumer price index (CPI) basket…

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As the economy reopens, we believe growth is set to surge. The United States is well along the path on vaccination, which is unleashing months of pent-up demand. Meanwhile, other parts of the world are lagging in vaccinations and confronted with potential challenges, including a stronger dollar. Given continued signs of progress and growth in the United States, we refocus tactically around domestic and high-quality assets. We also maintain a tactical overweight to equity over bonds, given incoming data as we enter the third quarter.

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