Seeking Ballast as the Dark Clouds of Complacency Gather

In an environment of pronounced macro, financial, geopolitical and structural concerns, risk perception in US markets remains low. Equity market valuation multiples are rich, high yield spreads are tight and implied volatility is low.¹ We believe the biggest risk today is the lack of “margin of safety”² as sovereign debt levels increase, geopolitical tensions rise and US economic growth becomes increasingly reliant upon technology capex, namely in artificial intelligence.

As the dark clouds of complacency accumulate, we seek ballast across assets that provide different layers of resilience. We continue to highly value the strategic hedge potential of gold given the fiscal and geopolitical dynamics currently in place. The monetary value of gold has been reasserting itself as the gold price has increased significantly over the past two years. We note that this rally has merely aligned gold with its 50-year geometric average relative to the stock of US public debt while bringing it closer to its geometric average versus the S&P 500 Index. Gold has historically been worth more than equities during periods of low confidence in markets, and it has been getting closer to its historical average relative to the S&P 500, as seen in the chart below.³

Gold, however, is not the only source of ballast. Nor is cash. In fact, one of our focuses in recent years has been on building resilience through businesses we believe offer ballast through their lower risk character. This is not achieved simply through higher allocations to traditionally defensive segments of the market like health care and consumer staples, though we do have meaningful exposure to these sectors. Rather, we evaluate stocks across industries from the bottom up in search of attributes we believe contribute to low correlations to the broader market, including strong balance sheets, high margins, diverse product lineups, long-lived assets and contractually obligated revenues.