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Komson: Thank you for tuning in to this episode of the Sage Advice Podcast. My name is Komson Silapachai, Vice President of Research and Portfolio Strategy here at Sage. And today we're going to be talking about asset allocation. October was a turbulent month for most investors with a broad-based decline and financial assets. U.S. equities, one of the best-performing market segments this year, fell nearly 7%. International equities fared worse, with developed markets down 8% and emerging markets down nearly 15%. High-quality fixed income also suffered negative returns, with Treasuries, investment grade corporate, and mortgage-backed securities all turning in negative absolute returns. Coming into the month, fears of Fed tightening, and emerging markets stress gave rise to a heightened risk aversion, resulting in the liquidation of crowded positions from active investors, which then provided a negative feedback loop for further risk reduction in the market. Notably the FANG stocks -- Facebook, Amazon, Apple, Netflix, and Google, which as a group were up over 50% for the year coming into September, fell 14% in October, and continue to fall during this month of November.

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We think that this volatility is due to the backdrop of central bank tightening. During this post-crisis period, investors have grown accustomed to the central bank asset purchases, an expectation that it will continue, which dampen market volatility across all asset classes. Removing this accommodation means adjusting to a new level of volatility. So what this means for an investor is that for any given shock to the market, positive and negative, we expect outsized move in both directions. For the time being, we think the market backdrop remains constructive for risk assets. The Fed Funds Rate adjusted for inflation still remains near zero. With the world still in an economic expansion, it bodes well for risk assets. Trade tensions seem to have stabilized and uncertainty around mid-term elections is behind us. And China has shown commitment to support its economy through monetary and fiscal stimulus.

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Given this backdrop we still favor being invested in equities, tilting towards emerging market equities and cyclical sectors in the U.S. We are also taking advantage of the weakness in certain spread sectors in fixed income, such as emerging market debt, high-yield, preferred stocks. We are remaining neutral in terms of duration as we think the Fed could pause and 2019.

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