Straight Talk

May 11, 2026

Five Things You Missed This Week

1. Hidden Macro Risks.

Three risks come to mind when asked what worries us the most. 1) China invading Taiwan. This is a known risk but one the markets don’t seem to have priced into thinking. 2) U.S. debt hits a gross domestic product level that investors start taking notice. That number remains elusive, but it certainly exists. 3) Retail investors now account for 30-50% of average daily trading volume, compared with just 10% about 10-15 years ago. If those investors stop buying and revert to selling, we could see a significant and sustained pullback in the stock market. One thing that could mitigate such a pullback involves the investment flows that continue going to passive funds such as indexed exchange-traded funds (ETFs).

2. Bond Market Concerns.

Concern definitely exists regarding intermediate and longer-term U.S. Treasury securities. In a bid to reduce interest payments during a severe economic slowdown, the federal government could decide to reduce coupon payments on existing debt without changing the maturity of the debt. We do not project such a calamitous outcome, but little question exists that elevated risk exists to long-term bond prices and yields. Continued supply side shocks and the debt crisis could force inflation higher, pushing long-term debt yields higher at the same time. At the least, these concerns continue to plague bond prices and place a floor under long-term bond yields for now.

3. Alternative Investments.

Alternative investments refer to a wide range of non-traditional investments. They include various approaches of hedge funds, private credit, private equity and direct investments in real assets, such as real estate and natural resources. Depending on risk assessment, liquidity and fees, alternative investments have a time and place in overall investment portfolios. But investors should take care when assessing promotional materials for alternative investments. Risk and volatility metrics and drawdown statistics, not to mention return premiums, can all represent somewhat dubious claims. And of course, it’s important to scrutinize fees of these relatively high-cost investments.

4. Hedging Global FX Risk.

A recent paper, “How Do Global Investors Hedge Currency Risk,” outlines how institutional investors manage currency risk. It uses data dating to 1998. It found that fixed-income investors hedge more frequently than equity investors, an unsurprising finding given that unhedged fixed-income positions exhibit much higher volatility than hedged positions. The study also found than non-U.S. dollar domiciled investors hedge more extensively than U.S. dollar investors, by an 85% to 51% margin. Hedge ratios vary by currency and periods of time, as hedging has increased since the global financial crisis. Hedging also depends on interest rate differentials, asset volatility and foreign-exchange volatility and momentum.

5. Tactical Asset Allocation Update.

It’s always important to remember that tactical allocations intend to take advantage of short-term mispricing in the market based on our quantitative forecast models. And these positions and allocation recommendations can change quickly. Currently, we favor high-quality bonds versus high-yield bonds, of which we are underweight. We favor U.S. large-cap stocks versus U.S. small-caps. We favor U.S. large-cap value stocks versus U.S. large-cap growth stocks. And we favor TIPS versus nominal core bonds. From a sector standpoint, we favor industrials based on a combination of economic cycle and valuation factors. We’re underweight health care stocks because of recent poor momentum and their apparent overvaluation, based on our metrics.