Finding Opportunities in Divergent Outlooks

For many financial professionals, calendar year-end presents an opportunity to take stock of a model lineup and evaluate larger asset allocation and portfolio construction shifts. But one major difference could make the 2020 exercise more challenging than 2019: a much greater dispersion in the outlook from the investment community.

Recall the market backdrop of Q4 2018. An equity selloff was seemingly driven more by de-risking than fundamentals. As financial professionals and investment practitioners assessed the landscape for asset allocation, economic conditions looked strong and equity valuations looked cheap. A consensus risk-on view emerged with some consistency in relative value between asset classes. Ten months later, returns have been strong, the Fed has changed course, and the outlook feels much less consensus driven. Among major investment banks that we track, the range in outlooks for the year-end S&P 500^® Index value is at its widest since 2011.

Dispersion of Year-End S&P 500^® Outlook

Source: Bloomberg

What does this all mean? Building out a decision-making infrastructure that reflects an openness to more regular asset allocation adjustments, whether as changes to target allocations or smaller moves to rebalance back to targets, may be prudent for the current environment. Going into next year, we expect that portfolio modifications may be motivated more by asset allocation concerns than by manager selection. But while replacing underperforming equity products that are still up double digits may not feel like the highest priority, greater uncertainty should bode well for active management. We look forward to helping you build and maintain more durable portfolios throughout the remainder of the year and into 2020.