05.12.09 update

Our BCA Research service just pulled the lever to move to an overweight equities position.  They use a 1-3 scale, where 1 = underweight, 2= neutral, and 3=overweight.  Their ratings on all asset classes are as follows:

  • Equities – 3
  • Bonds – 1
  • Cash – 2

With cash at neutral, it implies that they’re overweighting equities at the expense of bonds–specifically, Treasuries. 

So if your strategic (i.e. long-term) asset allocation plan is:

  • 60% stocks
  • 35% bonds
  • 5% cash

Then the following mix might be appropriate, using the BCA recommendations:

  • 70% stocks
  • 25% bonds
  • 5% cash


The balance of risks for the economy and financial markets have now shifted far enough that an upgrade of the equity market to overweight is also warranted.  We still prefer corporate bonds over stocks on a risk-adjusted basis.

If the recession is almost over and the banking sector is finally on a gradual recovery path, then the stock market should outperform Treasury bonds and cash on a total return basis.

Investors could wait for a correction, but we cannot be assured one will present itself.

They aren’t terribly concerned–as we have been–that P/Es did not get down to single-digit levels, as the risk-free rate is so low and “policy stimulus has been unprecedented.”

They have also found that collapses in earnings like we’ve seen this time round (-53%) have historically been correlated with annual returns of 15% over five years.