Market Thoughts: A bigger boat

June 20th marks the 50th anniversary of the release of the movie Jaws. The effects today seem a little cheesy. They did when it was released. And yet, that first summer blockbuster still manages to draw a wince, shriek and scare. Investors are treading water, as uncertainty tries to tug animal spirits under. You know if you know.

“A bigger boat” is a better catch phrase for the ambiguity circling investors. Markets have rallied, with stocks and bonds up on the year. If I asked what a basic balanced portfolio has returned year to date, I doubt many would say 4-5%. It doesn’t feel like it, but here we are. Hard earned.

There’s ‘finger wagging’ going on about the insurance proposition bonds offer in a market selloff. It was fair to wag when central banks were raising rates. But looking at a chart that simply shows correlations between stocks and bonds on the rise over the past few years is disingenuous.

In a ‘normal’ market environment, bonds rally in the event of a left tail event, helping to buffer drawdowns in a portfolio. We continue to see that happen as events in the Middle East escalate. Government bonds are rallying. They should.

When policymakers are the risk event (hiking rates), everyone suffers. The market’s risk-free rate is being pushed higher. Bonds sell off. Risk assets do as well. Where bonds lead, equities follow.

I’m seeing headlines again argue bonds no longer serve as diversifiers of risk in a portfolio. At inflection points in markets that certainly can be the case such as when central banks are hiking, or government fiscal profligacy becomes the concern. While stock-bond correlations have risen, even a low positive correlation is risk diversifying. It’s math. No one ever seems to point that out.

Over a market cycle, to borrow a line from the film, don’t fall into the trap of thinking you should “never put on a life jacket again.” The point being made in Jaws? Not wanting to extend the suffering of a shark attack. Floating around as bait, awaiting a nibble… or three. 

Core fixed income plays an important role diversifying risk. We can have an active debate about duration. That’s tactical positioning. How far out on the yield curve you want to be as interest rates are in decline or rising. As a strategic asset allocation investment tool, core bonds are foundational to managing risk. Hang onto that life jacket.

I‘d say the same thing about investing in global equity markets. The U.S. has led for a decade. It’s now giving some of its relative outperformance back. The same with the dollar. A portfolio invested in global equities is outperforming U.S. equities this year. It’s also been less volatile.

Like bonds over the long-term, an equity allocation that’s invested globally makes for a less bumpy ride. And similar to my observation about duration above, we tactically tilt more or less into equity regions, sectors and single stocks based on market opportunity. 

It’s been a challenging year for investors. The ‘mid-year mark’ makes for a moment to reassess the outlook. It’s rarely as bad as spun, but occasionally it can be. 

We face a geopolitical, macro and market environment warranting caution. That translates into exercising judgement, managing risk. It’s not a moment to downplay the threats swirling. In particular given valuation levels. The poster child of who not to be? Larry Vaughn, the mayor of Amity Island. Greed overwhelming prudence ends badly. 

Caution wisely exercised defines how we’re navigating markets. Emotion has nothing to do with investing. Be dogmatic about data. Embrace investment opportunity when presented. Be flexible with a market view. Run away from hubris, not to mention incendiary market commentary.

Summer markets are generally quiet or riotous. Embrace quiet. Riotous suggests a world less hinged. In that domain, we’ll all need a bigger boat.

*Unless explicitly stated otherwise, all data is sourced from Bloomberg, Finance LP, as of 6/18/25.