Sheltering in Place
Guided by our model, which indicated growing weakness in many risk assets, we aggressively moved to a defensive portfolio position early in the year and maintained it throughout the quarter. Towards the beginning of January, we took action to reduce client exposure to US small cap and natural resource stocks (-ex gold) and international equities as investor sentiment cooled significantly. When equity prices began to decline in late January, relative weakness in international markets and US small cap made these the ideal candidates for hedging existing US equity exposure that was tilted toward better performing large cap growth, high quality and low volatility stocks.
As 2020 begins, there is some residual strength from the 4th quarter rally, but valuation and sentiment metrics would argue for a first quarter top. We believe we are in the final innings of the advance that began a year ago. After a consolidation/correction in the first half of this year, the ninth inning could occur in the fall going into the election. This would fit the presidential cycle that typically behaves this way during the presidential election year.