Question: What is driving high cash allocations in equity portfolios?
Phil Orlando: It's been very uncharacteristic for us to have entered this year with as bearish a view on the economy in the markets that we've had. So, right now our cash allocation at 10%, which is 7% over neutral, is the largest cash allocation we've had in the 20 years that I've been at Federated Hermes. We think that defensive position is appropriate. We believe that we will begin to reduce that cash position once we get some clarity on some of these big fundamental issues that we believe are overhanging the market, such as where's inflation going? Are we going into a recession? How high is the Federal Reserve going to take interest rates? Do we get a change in control in Washington that introduces a legislative check and balance? Unless and until we get some clarity on those issues, we think having an above average cash position provides investors with some safety.
Question: When should investors consider adding to equities?
Phil Orlando: There's a tremendous amount of uncertainty in the macroeconomic environment right now and so having a defensive position, in our view, makes sense. In terms of when do we get more aggressive, when do we get the defense off the field and get the offense back on the field, I think we've got to gauge the progress or the clarity on some of these key fundamental issues. When does inflation start to come down? How high does the rate of unemployment go up? Are we on a glide path in a recession? How aggressive is the Federal Reserve going to take both quantitative tightening and the increase in interest rates? What are the results of the midterm elections? All of that suggests that we will be in a better position over the next couple of months to gauge whether or not we should stay defensive or whether or not we should begin to work some money back into the equity market.