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We’re evacuating Zone A in Sarasota in response to Hurricane Ian as this quarterly commentary is completed. Our US Equity ETF portfolio has a cash or cash equivalents target of 47%. That is a very high allocation and is rare. It can change at any time.
The reasons behind this large allocation include the rising interest rate policy of the Federal Reserve, which appears likely to continue into next year. The Fed is also shrinking its balance sheet, a process that is scheduled to continue through all of next year. And while markets have been trying to anticipate when the Fed will stop tightening and pivot to neutral, we have not engaged in that speculation.
We have also been watching the weakness in the real economy spread. So a weakening economy is now coupled with Fed tightening. This combination is a headwind for markets. This is another reason for cash reserves.
Inflation may be peaking, but it is doing so at a much higher level than the Fed appears willing to accept. Thus, the Fed must either accept inflation’s running for too long at too high a rate of change, or the Fed must continue its tough policy even as the economy weakens.
Meanwhile, we see an expanding regional shooting war coupled with a worldwide financial, payments, and sanctions war. That appears to be the likelihood for next year and possibly beyond. When it comes to war, all scenarios are problematic speculation until events actually occur.
All this falls into the realm of rising risk premia and makes for difficulty in forecasting. Meanwhile, corporate earnings are under pressure for the reasons outlined above. As this quarterly commentary is published, we are continuing with our strategically driven large cash reserve. We again remind readers that it may change at any time.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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