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By David RichmanManaging Director, Advisor Institute

Today's dynamic markets should make for interesting first encounters in the weeks ahead. Consider harnessing the power of a curiosity gap—the space between what someone knows and what they're intrigued to know. A pithy ism, timeless sound bite conveying your financial beliefs, or thesis, timely statement about market conditions, can help you create a curiosity gap that leaves people wanting to learn more in a follow-up phone call.

The May issue of The BEAT presents an ism and three theses to help create a curiosity gap and turn your first encounters into follow-up phone conversations. I caught up with Jim Caron, CIO of the Portfolio Solutions Group to help provide further context. Below are the highlights of our conversation presented in the scope of four market memes that could stimulate conversation in the weeks ahead.

"The Market's" Continued Climb

David: "Jim, with the Dow and the S&P 500® now getting close to eclipsing all-time highs, please comment on The BEAT's most recent thesis: 'It's time to build dry powder.'"

Jim: "The momentum factor is at extremely high levels and is most vulnerable to repricing in a correction. But the momentum and quality factors are highly correlated these days. This is important to note since both reflect attributes common to large-cap companies and tech. A decline in momentum may dominate the initial stages of a correction, lowering prices and creating an opportunity to buy quality at a more reasonable price. We believe an investor should be patient and wait for the opportunity to buy the dip."


David: "While The BEAT does seem confident that inflation finally appears to be fading, you don't seem particularly sanguine, given your thesis: 'Inflation is falling, yet at a disappointing rate.'"

Jim: "Inflation poses one of the biggest risks across broad financial asset prices. Inflation is falling, yes, but at a disappointing pace. The decline is largely the result of goods prices remaining stable as service sector prices cool slowly. PMIs (Purchasing Managers Indexes) are now on the rise globally, which creates the risk that goods prices may also start to rise. It increases both inflation and policy risks if this happens. Goods prices are something we'll be watching closely as an early risk indicator for financial asset prices."

Geopolitical Risk

David: "Given continued geopolitical risk, I particularly appreciated hearing your new ism: 'The best antidote to geopolitical risks is liquidity.'"

Jim: "The way that we see it, geopolitical risk is a form of systemic risk and therefore difficult to hedge. The risk can be managed by increasing liquidity in portfolios. The reason is that geopolitical risks tend to manifest themselves by creating shock events in markets that create a pervasive liquidity risk across financial markets. As such, owning high quality liquid and short duration assets can be beneficial. We'll closely watch financing markets and cross-currency basis spreads—amongst other things—as signposts of possible liquidity risks."

Disappointing Total Returns of Bond Portfolios

David: Jim, there is much frustration among advisors and clients alike on recent disappointing total returns of bond portfolios. With The BEAT's current thesis, "Now is a good entry point for bonds," it sounds like now is not a good time to throw in the towel. Do you agree?

Jim: "I believe we're entering into a longform correction and that we should expect range-bound markets for both equity prices and bond yields. We don't have evidence that that is the start of a bear market. As a result, we look to buy dips to find value and earn carry. We moved our overweight equity allocation to neutral at the end of March yet maintain a view to hold credit spreads as we expect a soft landing and a tame default cycle."

Bottom Line: An intriguing ism and thesis can help you build a curiosity gap and can turn first encounters into follow-up phone calls as this summer kicks into gear.