The best thing people can do today is try to preserve their optionality by not forgetting about fixed income and maintaining a relatively short duration.

Preserving Optionality

Maintain a shorter duration on the equity side, focus on dividend payers and high cash flow companies.

Focus on Dividend Payers

Tech margins have been holding up, limiting the downside to the market in case of a slow patch or recession, but it's tough to see how earnings in aggregate continue to expand.

Tech Margins and Earnings

## Investment Strategies for Preserving Optionality

In our previous newsletters, we discussed the importance of preserving optionality in your investment portfolio. Today, we want to expand on this topic and provide you with some actionable strategies to achieve this goal.

### Fixed Income: Don't Forget About It

While cash may feel comfortable, it's essential not to overlook the potential benefits of fixed income investments. By maintaining a relatively short duration, you can position yourself favorably to take advantage of market pullbacks. If equities experience a significant downturn, you'll have the capital available to deploy and catch up on missed opportunities.

### Equities: Focus on Dividend Payers and High Cash Flow Companies

When it comes to equity investments, we recommend maintaining a shorter duration as well. Consider focusing on dividend-paying stocks and high cash flow companies. While there is considerable excitement surrounding emerging technologies like artificial intelligence, it's crucial to remember that their impact on productivity may take time to materialize. Additionally, we cannot ignore the possibility of a soft patch in the economy over the next 12 months. Therefore, it's prudent to prioritize profits and the optionality they provide.

### Tech Sector: Taking Their Medicine

The tech sector has shown resilience in recent times. Despite challenges, tech companies have taken necessary measures to defend their margins. Unlike some industries with pricing power, tech margins have remained relatively stable. This factor limits the downside risk to the overall market in the event of a slowdown or recession. However, it's worth noting that even if inflation remains above the Fed's target and real growth slows, it may be challenging for earnings to continue expanding.

As always, our focus is on helping you navigate the ever-changing investment landscape. By preserving optionality and considering these strategies, you can position yourself for long-term success.

Stay tuned for our next newsletter, where we'll explore more insights and opportunities.

Best regards,
Your Investment Team

Investment Strategies for Preserving Optionality

Dividend payers and high cash flow companies

It will boost productivity over the longer term

It will avoid a soft patch in the economy

- JP Morgan suggests preserving optionality to catch up to above-average performance
- Maintaining a short duration in fixed income and equity investments is recommended
- Focus on dividend payers and high cash flow companies in equity investments
- While artificial intelligence may boost productivity in the long term, it may not prevent a soft patch in the economy in the next 12 months
- Profitability and cash flow optionality are emphasized
- Tech companies have been managing their margins well and may limit downside risk in a slow or recessionary economy
- It is difficult to see earnings expanding if inflation remains above the Fed's target and real growth slows.

David Lebovitz, global market strategist at JPMorgan Asset Management, suggests investors that missed the rally in tech stocks preserve their "optionality" by buying short-duration fixed income assets. "If you get a big pullback in equities, you're going to be able to deploy that capital and try to catch up," he says on "Bloomberg Surveillance."
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What's the JP Morgan plan to catch up if I was above average, but nothing like what NVIDIA did?

So I think the best thing that people can do today is try to preserve their optionality.

And we would encourage 2 ways of doing that.

First would be by not forgetting about fixed income.

We talked about how sitting in cash feels comfortable, and obviously you're getting paid from the bond market.

Once again, we still think that that optionality, maintaining a relatively short duration, could work in your favor.

Because if you get a big pullback in equities, you're going to be able to deploy that capital and try to catch up to your question.

The other thing is we would maintain that shorter duration on the equity side as well, focus on the dividend payers, focus on the high cash flow companies.

Again, there's a lot of excitement and a lot of enthusiasm about things like artificial intelligence.

And I do think that it'll boost productivity over the longer term, but I'm not sure it's going to boost productivity tomorrow And I'm not sure it means that we're going to avoid some sort of soft patch in the economy over the course of the next 12 months so this all feels very sentiment driven That's why we're so focused on profits and the optionality that those cash flows can provide.

NVIDIA's making money, Meta's making money.

No, and we talked about this a couple of months ago.

What was really interesting about watching tech into the end of 2022 in the beginning of this year is that they've been taking their medicine, right?

They don't necessarily have the type of pricing power that you're seeing from say the airlines in the current environment.

And so you're actually seeing tech margins hang in there.

And I think that that does limit the downside to the market if we do hit a slow patch or a recession in the economy, but my general take is that even if inflation is still above the Fed's target and real growth is slowing, tough to see how earnings in aggregate continue to expand.


Speaker 0: What's the JP Morgan plan to catch up if I was above average, but nothing like what NVIDIA did? So I think the best thing that people can do today is try to preserve their optionality. And we would encourage 2 ways of doing that. First would be by not forgetting about fixed income. We talked about how sitting in cash feels comfortable, and obviously you're getting paid from the bond market.

Once again, we still think that that optionality, maintaining a relatively short duration, could work in your favor. Because if you get a big pullback in equities, you're going to be able to deploy that capital and try to catch up to your question. The other thing is we would maintain that shorter duration on the equity side as well, focus on the dividend payers, focus on the high cash flow companies. Again, there's a lot of excitement and a lot of enthusiasm about things like artificial intelligence. And I do think that it'll boost productivity over the longer term, but I'm not sure it's going to boost productivity tomorrow And I'm not sure it means that we're going to avoid some sort of soft patch in the economy over the course of the next 12 months so this all feels very sentiment driven That's why we're so focused on profits and the optionality that those cash flows can provide.

NVIDIA's making money, Meta's making money. Where does tech fit into that? Just to build on that a little bit more. No, and we talked about this a couple of months ago. What was really interesting about watching tech into the end of 2022 in the beginning of this year is that they've been taking their medicine, right?

They've been laying people off. They've been defending that margin. They don't necessarily have the type of pricing power that you're seeing from say the airlines in the current environment. And so you're actually seeing tech margins hang in there. And I think that that does limit the downside to the market if we do hit a slow patch or a recession in the economy, but my general take is that even if inflation is still above the Fed's target and real growth is slowing, tough to see how earnings in aggregate continue to expand.

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Missed the Rally? JPM's Lebovitz Has a Catch-Up Strategy