As Americans, we find it very difficult to wait for anything – let alone for the days of positive equity markets to return once again.
So, when we are asked to wait, two questions arise: “What are we waiting for?” and “What do we do while we are waiting?”
We will answer the first question in our second section of this report. We answer the second question right here. We weightlift while we wait. Better said, we look to the “Barbell Strategy” as an investment approach when waiting for future events to unfold.
According to Investopedia.com: “The barbell strategy is an investment concept that suggests that the best way to strike a balance between reward and risk is to invest in the two extremes of assets while avoiding middle-of-the-road choices.”
For a complete description by Investopedia please check the link below:
In our own words: “The barbell strategy, in times of great uncertainty, advocates pairing two distinctly different types of assets or strategies into one portfolio.” In our example below, one basket holds investments that would typically outperform in a robust economy (on the right-hand side), while the second basket holds assets that would typically outperform in a slowing economy, or one headed for recession (on the left-hand side.) In the middle are sectors we would not favor in either extreme scenario. To describe this concept, think of a 100lb. set of barbell weights. On the left side, you have two plates, one weighing 24lb. and another weighing 9lb. representing sectors where we have strong conviction (in a slow growth environment), all the while totaling 33lb. On the right side you have three plates weighing 18lb., 8lb. and 7lb., again totaling 33lb. and sectors where we have deep conviction in a robust growth environment. Connecting these two opposite sides and in the middle is the bar that weighs 34lb. The bar comprises six sectors where we see very little opportunity in this environment. *Please note the Ratios (X) represent the given sector weighting vs. the Morningstar Moderate Target Risk Benchmark.
THE BARBELL STRATEGY
Slowing Growth Scenario
A very likely scenario that could be brought on by a more-than-aggressive Fed and inflationary pressure that drives down the growth rate of Economy as measured by GDP to the 2% or lower range. In this scenario, you would desire to pay a premium for earnings growth and seek to own stocks in both the Tech and Consumer Discretionary Sectors.
Robust Growth Scenario
Also a very likely scenario that could be brought on by a rapid re-opening of the Economy while Inflation peaks and rollovers coupled with a Fed that does not accelerate rate hikes. In this scenario, Cyclical Sectors such as Energy, Materials and Financials should outperform.
Conclusion
With an equal probability of either scenario taking hold over the next several quarters, we believe it to be prudent to “straddle the middle” and see where things ultimately play themselves out.
