A downloadable PDF copy of the Article:. The risk management model Figure 1 seeks to reduce exposure to fixed-income sectors most sensitive to equity drawdowns. The risk management model improved during the month and entered March recommending full model exposure to areas most sensitive to equity markets: U. High Yield, Emerging Markets, U. Investment Grade, and Floating Rate Notes. The bullish reading from the model is driven by strong internals.
Five of the seven price-based measuresโincluding relative strength, trend, and breadthโremain bullish. External measures also improved. The short-term trend in global tradeโas measured by the Baltic Dry Indexโflashed a bullish signal during the month Figure 2 , joining bullish readings from option-adjusted spreads and high-yield and emerging market breadth. Investor sentiment remains excessively optimistic, which is bearish for stocks. For now, the weight-of-the-evidence recommends a fully invested allocation to fixed income sectors according to the model.
After the strong performance by the Bloomberg Barclays U. Aggregate Bond Total Return Index at year-end , the index dropped for the second consecutive month in , down about Their fiscal policy preferences are vastly different. The Trump tax cuts would expire at the end of , and taxes would likely be raised on the wealthy under a Biden administration. Trump would extend the tax cuts.
He would likely shy away from major infrastructure bills. Despite these differences in policy approach, neither one seems interested in reducing the budget deficit Figure 3. That should result in a higher term premium and higher interest rates, which could slow economic growth.
Interest costs will continue to skyrocket, regardless of who occupies the White House. The fastest-growing item in the federal budget, interest expense, will soon exceed our spending on defense, according to the CBO. Entering March, the fixed income allocation strategy continued to favor risk-on leadership but did not rebalance. The model remains overweight versus the AGG benchmark , U. Treasuries allocated across short-, intermediate-, and long-duration , High Yield, and Emerging Market Bonds.
