Victor Haghani, founder and CIO of Elm Wealth and co-founding partner of Long-Term Capital Management, discusses the market volatility. Heavy selling lashed Wall Street anew Monday, with longer-dated Treasuries joining stocks and the dollar in a deepening slump.

Washington

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Expert says it 'makes sense' U.S. equities are 'underweight'

So we're going to talk specifically about ETFs but I want to start broadly about this market because as Eric mentioned we're starting to see some nervousness creep into the ETF flows up until really this point. It had just been this consistent bid to buy the debt. But now folks are really wondering is there a dip to buy or do we have much more pain to go. And I'm curious where you fall. You know predicting the market in the short term is really really difficult. Maybe impossible. So I think the idea and thinking about where to be in your asset allocation is to come in and say what should drive your asset allocation. And ultimately it's two things. It's the expected reward for owning equities and the risk. So let's think about where does expected return sit right now for U.S. equities. It's pretty it's pretty well agreed among analysts that expected returns for long term holding of U.S. equities is pretty low relative to safe assets of tips or U.S. government bonds. And it's been that way for a while. We have a really high price earnings ratio whether spot or cyclically adjusted and tips are offering a pretty good yield. Now how safe they are is another question that we could spend a whole chat about. And then no matter how you look at it we're in a we're in a very volatile environment now. So risk is high. That means you want less exposure. Right. And returns are relatively low. So I think it makes sense to be pretty underweight U.S. equities without even thinking about where is the market going to go next week. Just as a as a sensible asset allocation you know underweight U.S. equities makes sense. I think non-U.S. equities look different. You know I think a more neutral waiting there makes sense because the expected return is there. The risk is high but the expected return is there at least in the long term. So underweight U.S. equities and this is only on speculation that President Trump might push something at the Fed if he were to actually fire Jay Powell. What would that mean in terms of the rewriting of U.S. equities and other U.S. assets. OK. So first of all when I say be underweight U.S. equities I'm saying be underweight U.S. equities. Thinking about the long term nothing to do with what's in the news right now. You know it's just what's the what are the earnings you get. What are the dividends for the long term relative to tips. If something like that happens we're going to continue to be in this high risk state. So meaning also equities look less good when we're in a high risk state. And you know it could be pretty pretty nasty for the bond market. So all of a sudden if we see interest rates up higher than equities would be offering an even lower return relative to the safe assets or safer assets. And you know and that would also certainly be consistent with being underweight equities. So if you think that might happen in the market clearly does an analyst clearly do worry about this conflict. You know it also is. It also supports the idea of being underweight equities right now in this environment. I think the key thing is to have a framework and a plan. So when things change you have to buy U.S. equities again. You know you can't. You know that being underweight is for these conditions of low expected return high risk be underweight. But when risk settles down again which it will at some point and or maybe interest rates go a lot lower it might be a time to increase exposures again.

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Kyiv

Ukraine Invasion

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Damascus

Middle East Conflict

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Mexico City

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Jerusalem

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As Suwayda

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New Jersey

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