A high six-month US Treasury bill yield does not provide medium and long-term benefits. We suspect that locking in a T-bill yield at the expense of maintaining a broader portfolio return will inhibit portfolio results.
- As investors and risk managers, we need to ask ourselves how to align portfolios for likely near-term headwinds, but also anticipate the potential long-term rewards just over the horizon. Locking in high T-bill yields is not the strategy, especially when you consider we are two-thirds through a bear market.
- Those lulled into a false sense of security by moving into T-bills rather than building resilient portfolios are likely to be disappointed by their results just a few years out.
- While the Federal Reserve is committed to fighting inflation and holding rates “higher for longer”, there are increasing signs that the economy is weakening in an accelerating manner. Furthermore, the recent, unexpected banking crisis has also worsened the economic backdrop. We expect that credit availability will decline over the next 12-18 months and the cost of credit will rise meaningfully.
- Private employment gains slowed to below +200,000 in March for the first time since 2020. Construction employment showed the first sizeable decline of the cycle. We remain confident that employers in manufacturing and housing will choose to reduce employment and related labor costs in the face of declining demand and rising wages.
- Investors are not confident in the profit outlook for corporations. They are 23% net bearish according to the American Association of Individual Investors poll1 (put footnote below). Yet, in spite of these observations. markets do not reflect the corporate earnings declines we expect. In fact, they have been range bound for more than 4 months.
- For now, our portfolios maintain a “quality income” vigil and seek growth from industries with less than average business cycle risk such as pharmaceuticals (our largest sector overweighting). This comes at the expense of underweights in less well-capitalized and indebted firms.