Portfolio Management Spring 2025

In my view, the economy is currently in a late-cycle phase with heightened risks of slipping into a recession. This phase is characterized by declining corporate profits, reduced credit demand, rising cost pressures, and a shift toward easing monetary policy. In light of these conditions, a balanced investment strategy—spanning both stocks and bonds—appears prudent to me. Bonds are offering their highest income yields in years, while stocks still present opportunities for appreciation in response to Federal Reserve rate cuts. Additionally, a balanced approach can mitigate portfolio drawdowns, which are always a possibility. Historically, periods of monetary easing create a favorable interest rate environment for both bonds and stocks.

Equities Strategy
A barbell asset allocation approach, balancing cyclical and defensive stocks. On the cyclical side, I favor Technology and Consumer Discretionary sectors, which have been among the worst performers in this correction and may be primed for strong rebounds. On the defensive side, I prefer Utilities and Healthcare, which provide steady and reliable earnings, particularly if the economy slides into a recession.

Within equities, I am focusing on large-cap growth stocks, particularly in Technology and Consumer Discretionary sectors, which have seen significant valuation discounts. The tech-heavy Nasdaq Composite includes many stocks I find appealing as a GARP (growth at a reasonable price) investor. I’m particularly targeting stocks poised to benefit from AI-driven tailwinds. In my opinion, consumer spending is the key to the stock market’s performance. If unemployment remains stable, I anticipate that economically sensitive stocks will recover in the second half of the year. For now, I am accumulating them while their prices remain suppressed.

Research by CFRA demonstrates that sectors most affected during market corrections or bear markets tend to perform strongly afterward. Following the 12 corrections since 1990, the S&P 500 gained an average of 22% in the six months following the correction’s conclusion. The three worst-performing sectors averaged returns of 27% and 34%, respectively, outpacing the S&P 500 in 83% and 67% of instances. By contrast, the sectors with the least declines during the correction averaged just 14% gains six months later and beat the market only 8% of the time. In this correction, Communication Services, Consumer Discretionary, and Information Technology sectors have been the weakest performers, making them likely outperformers moving forward.

I am maintaining U.S. Mid- and Small-cap positions as a diversification strategy alongside large-cap growth stocks. This has been unsuccessful so far, as the Russell Small Cap Index has entered bear territory. The rapid decline in small caps reflects recession fears and the potential adverse impact of a global trade war on earnings. Historically, small caps lead the market out of a recession. I believe the time to accumulate small caps will be during a recession when prices are low. A Federal Reserve rate cut could also spur their recovery, benefiting regional banks, a heavy component of the Russell Small Cap Index.

Defensive Sector Investments
Defensive sectors tend to be more insulated from growth slowdowns. The Healthcare sector is particularly appealing due to its attractive valuations relative to the S&P 500. It offers exposure to strong long-term drivers, including an aging U.S. population and increasing healthcare spending in emerging markets. The sector also boasts improving fundamentals, such as robust cash flow. According to FACTSET, Healthcare is the third cheapest sector, with potential for 25% price growth by year-end. Utilities, similarly, offer reliable earnings growth that is sustainable even during recessions. Historical data shows that power demand has been minimally affected by economic downturns, with average demand declines of just 0.2% during recessions since 1960, per Morgan Stanley.

International Investments
Demand for U.S. assets and the dollar is declining, with the U.S. dollar potentially having peaked at its highest level since Bretton Woods. A weakening dollar makes foreign equities more attractive to U.S. investors, as returns from these investments increase when converted back to dollars. This dynamic can boost demand and prices for foreign stocks. Additionally, a weaker dollar benefits global growth and U.S. multinational companies by making American goods and services cheaper for foreign buyers. Valuations for foreign equities remain more appealing than those of U.S. equities. Foreign governments are stimulating their economies, whereas the U.S. is tightening fiscal policies and attempting to rein in spending and debt accumulation. While mindful of the negative impacts of the ongoing trade war, I am gradually increasing exposure to foreign equities.

Gold and Diversifiers
Gold has proven to be a strong portfolio diversifier during recent market drawdowns, outperforming other diversifiers such as Treasuries and the U.S. dollar, both of which have seen pullbacks. I prefer gold over crypto as a hedge against excessive government borrowing and deficit spending. Gold offers protection during times of inflation and geopolitical uncertainty. Many foreign governments are accumulating gold reserves to hedge against currency devaluation and geopolitical risks, supporting gold prices.

Bond Strategy
Overall, I see bonds as an effective diversifier against equities, as bond yields have normalized. This normalization provides protection during market corrections. Current bond yields are historically attractive enough to rival stock returns on a risk-adjusted basis.

In bonds, I prioritize investment-grade corporate bonds with short-to-intermediate maturities. Capital outflows from the U.S. have accelerated due to uncertainty about the dollar’s status as a reserve currency, negatively impacting U.S. Treasury prices. Typically, Treasuries benefit from a flight-to-safety dynamic during market turmoil, but that hasn’t been the case recently. I believe Treasury prices will recover once tariff uncertainty subsides.

Given recession risks, I am tilting toward investment grade intermediate bonds, which provide competitive yield and potential price appreciation as the Federal Reserve cuts rates. Quantitative tightening, through reductions in the Fed’s balance sheet, may further support intermediate to longer-term bond prices. I prefer investment grade over non-investment grade because of rising default risk threat in a possible recession.

I am reducing positions in non-investment-grade bonds and leveraged loans, as recession concerns and widening credit spreads create a less favorable outlook for these assets. Although high-yield bonds offer better yields, I prefer taking incremental portfolio risks with equities, which could deliver double-digit returns over the next year. Investment-grade bonds with intermediate or longer maturities are better suited to offset equity risks.

Cash equivalents remain attractive in the short term, though yields may decline after a rate cut. My cash-equivalents position includes ETFs that invest in inflation-indexed Treasury Bills, as well as investment-grade floating-rate notes with minimal interest rate risk.

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Past results are not predictive of results in future periods. While money market funds seek to maintain a net asset value of $1 per share, they are not guaranteed by the U.S. Federal government or any government agency. You could lose money by investing in money market funds. The market indexes are unmanaged and, therefore, have no expenses. Investors cannot invest directly in an index. The S&P 500 Index is a market capitalization-weighted index based on the results of approximately 500 widely held common stocks. The S&P 500 is a product of S&P Dow Jones Indices. The Russell 2000 Index is a stock market index that measures the performance of the 2,000 smaller companies included in the Russell 3000 Index. The Russell 2000 is managed by London's FTSE Russell Group, widely regarded as a bellwether of the U.S. economy because of its focus on smaller companies in the U.S. market.