With critical policy pivots on the horizon, investors should approach asset allocation with full appreciation for downside risk and stay focused on relative value and security selection.

Investors have enjoyed economic stability and positive market returns for years, but stretched valuations and a changing macroeconomic backdrop suggest a change is coming.

Balancing the risks against a backdrop of buoyant markets, it is a good time to pause and scan the horizon for new directions the markets may take. And after reviewing the landscape, we conclude that the lack of near-term positive catalysts combined with current valuations does not offer sufficient margin of safety to support a risk-on posture. While we wait for clarity on key risks or more attractive valuations, we are focused on quality sources of yield to increase portfolio carry while still keeping some dry powder.

Overall risk

With the macroeconomic backdrop evolving in the face of potentially negative pivot points and considering asset prices generally are fully valued, we are modestly risk-off in our overall positioning. Note this is a shift in our views from the start of the year. We encourage investors to consider actively managing their portfolios, emphasizing relative value and security selection. We recognize events could still surprise to the upside, but starting valuations leave little room for error.