Week in Review…

Market indexes continued to experience significant volatility as investors adjusted their future expectations in response to increasing global trade tensions.

• The S&P 500 rose by 5.70%
• The Dow Jones Industrial Average increased by 4.95%
• The tech-heavy Nasdaq rose by 7.43%
• The 10-Year Treasury yield closed at 4.49%

Last week was filled with significant economic releases that provided a comprehensive view of the current economic landscape. On Monday, the change in the total value of outstanding consumer credit from the previous month increased by $81 million, indicating a bearish economy. On Tuesday, the American Petroleum Institute reported that U.S. crude oil inventories fell by 1.057 million barrels for the week ending April 4, after a 6.037 million barrel spike the previous week.

The Federal Open Market Committee (FOMC) meeting minutes were published on Wednesday, offering a detailed account of the discussions and decisions made during the latest policy meeting. On Thursday, the initial jobless claims and Core Consumer Price Index (CPI) data were released. The Core CPI for March rose 2.8% on an annual basis, lower than the forecasted 3% change. Additionally, the labor market showed signs of cooling with continuing jobless claims coming in below forecast at 1,850 claims and initial jobless claims coming in as anticipated with 223,000 claims for the week.

Finally, on Friday, the Core Producer Price Index (PPI) and Michigan Consumer Expectations were released. The Core PPI for the month of March fell by 0.1%, indicating a potential decrease in the price of goods and services. Furthermore, consumer sentiment fell sharply in April, marking the fourth consecutive month of declines, with the University of Michigan’s consumer sentiment index dropping to 50.8.

Private Credit: Navigating Sponsored and Non-sponsored Lending

Private credit markets are experiencing substantial growth, providing investors with an expanding range of opportunities amid a decline in bank lending and evolving risk dynamics. According to Morgan Stanley, the private credit market was valued at approximately $1.5 trillion at the beginning of 2024, up from around $1 trillion in 2020, and it is projected to reach $2.8 trillion by 2028.

However, with opportunity comes complexity. Navigating these markets demands experienced managers, disciplined investors, and a deep understanding of risk. Those considering investments in private markets should prioritize managers who have effectively weathered multiple credit cycles.

Within private credit strategies, managers typically concentrate on either sponsor-backed lending or non-sponsor-backed lending. As private credit grows to become a larger part of investors’ portfolios, distinguishing between the various strategies becomes increasingly crucial.

Sponsor-backed private credit

Sponsor-backed private credit refers to financing arranged by private equity firms, or sponsors, to acquire companies or support the objectives of portfolio companies. In these arrangements, the private equity firm selects the target company for investment. Lenders involved in sponsor-backed transactions often focus heavily on the track record and reputation of the private equity sponsor, in addition to assessing the creditworthiness of the underlying borrower. Notably, sponsor-backed financing generally comes with more flexible terms, placing fewer restrictions on the borrower and allowing greater leniency regarding financial performance metrics. This type of structure is commonly referred to as “covenant-lite” in the private credit sector.

Non-sponsor-backed private credit

Private credit that isn’t backed by sponsors involves financing arrangements made directly between borrowers and lenders. In these transactions, the absence of private equity backing means that lenders must independently source deals and maintain a steady pipeline, along with strong underwriting capabilities and operational expertise. Additionally, these agreements typically come with more stringent covenants designed to better safeguard investors’ interests.

A study by S&P Global examined loans originated between 2014 and 2H 2020 and revealed that the median recovery rate for covenant-lite loans was 64.8%, compared to 98.7% for fully covenanted loans. This discrepancy highlights that, while loans with stricter covenants may experience more frequent defaults, they provide a better framework for protecting principal investments from losses resulting from those defaults.

As the private credit asset class continues to expand and mature, it’s important for investors to recognize the various nuances that come with the different types of private credit. Financing that is sponsor-backed versus non-sponsored requires distinct managerial expertise to effectively implement the strategy. Investors should not only pay attention to the specific investment approach but also place greater emphasis on selecting the right managers.

The market will be closed on Friday to observe Good Friday, making it a short week with limited economic data releases.

On Wednesday, we will receive the retail sales data, which is a crucial indicator of consumer spending. Consumer spending accounts for a significant portion of economic activity, making retail sales data an important measure of the economy’s health. This data helps investors and policymakers gauge potential inflationary pressures and adjust their strategies accordingly.

Also on Wednesday, Fed Chair Jerome Powell will deliver a speech. This event is particularly important due to the recent market volatility in both equity and bond markets stemming from the ongoing trade war. Investors will be closely monitoring Powell’s remarks for insights into the Federal Reserve’s future monetary policy and its approach to managing economic uncertainties. The verbiage Powell uses can significantly influence market sentiment and expectations regarding interest rates and economic stability.

This content was developed by Cambridge from sources believed to be reliable. This content is provided for informational purposes only and should not be construed or acted upon as individualized investment advice. It should not be considered a recommendation or solicitation. Information is subject to change. Any forward-looking statements are based on assumptions, may not materialize, and are subject to revision without notice. The information in this material is not intended as tax or legal advice.

Investing involves risk. Depending on the different types of investments there may be varying degrees of risk. Socially responsible investing does not guarantee any amount of success. Clients and prospective clients should be prepared to bear investment loss including loss of original principal. Indices mentioned are unmanaged and cannot be invested into directly. Past performance is not a guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange.

An alternative investments strategy is subject to a number of risks and is not suitable for all investors. Investing in alternative investments is only intended for experienced and sophisticated investors who are willing to bear the high economic risk associated with such an investment. Certain risks may include but are not limited to the following: loss of all or a substantial portion of the investment, short selling or other speculative practices, lack of liquidity, volatility of returns, absence of information regarding valuations and pricing, complex tax structures and delays in tax reporting.

Securities offered through Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC, and investment advisory services offered through Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser. Both are wholly-owned subsidiaries of Cambridge Investment Group, Inc. V.CIR.0425-1490

Week in Review…

Market indexes declined last week as investors adjusted their future expectations in response to increasing global trade tensions.

• The S&P 500 declined -9.08%
• The Dow Jones Industrial Average dropped -7.86%
• The tech-heavy Nasdaq fell -9.77%
• The 10-Year Treasury yield closed at 3.99%

Last week, markets were transfixed by the sweeping tariffs presented by U.S. President Trump and the idea of an ever-escalating trade war. However, in the background, several key economic reports were released that might have been overlooked. Here is a summary of the important economic reports from last week.

The labor market data was significant. February’s Job Openings and Labor Turnover Survey (JOLTS) report showed fewer job openings than forecast, confirming a softening labor market. On Wednesday, the ADP Nonfarm Payrolls report for March came in higher than expected, adding 155,000 jobs compared to the expected 118,000, contrasting February’s underperformance. Friday’s Bureau of Labor Statistics Nonfarm Payrolls report confirmed March’s labor market strength, with employment changes beating forecasts, adding 225,000 jobs compared to the expected 137,000. The Private Nonfarm Payrolls report also exceeded expectations at 209,000. The Unemployment Rate for March ticked higher to 4.2%. Weekly employment data provided mixed signals, with continuing jobless claims higher than expected and initial jobless claims lower.

Survey data from the Services and Manufacturing industries was also notable. S&P Global revised both the Manufacturing and Services Purchasing Managers’ Indexes (PMI) upward, providing optimism. However, ISM Manufacturing and Services PMI data disappointed. The ISM survey, which focuses on larger companies and is based on data from purchasing and supply executives, indicated conflicting inflationary pressures. Manufacturing prices rose, while services prices fell.

Overall, last week’s data highlighted the complexity of the economy. The mixed signals from various reports suggest that market participants, including the Federal Reserve, will need to carefully navigate the ever-changing economic landscape. The contrasting data points underscore the importance of a nuanced approach to economic analysis and policy-making.

The Underrated Power of Mid-Cap Stocks: Growth, Returns, and Diversification

In the dynamic world of investing, mid-cap stocks offer a compelling blend of growth potential and relative stability, often overlooked despite their strong historical performance and diversification benefits. This article explores the key advantages of mid-cap investing, highlighting their outperformance, attractive risk-adjusted returns, growth potential, and diversification benefits, while also addressing their under-allocation and inherent risks.

A History of Outperformance and Enhanced Risk-Adjusted Returns

Historically, mid-cap stocks have demonstrated a strong track record of outperforming both large and small-cap equities. MSCI data shows the MSCI World Mid Cap Index surpassed both larger and smaller companies between October 2008 and October 2012. This trend is further supported by SPDR’s analysis of the S&P MidCap 400 between beginning in 1994, which reveals an average annualized excess return of 1.12%. Specifically, the S&P MidCap 400 has outperformed the S&P 500 (large caps) by 2.03% and the S&P SmallCap 600 by 0.92% annually since December 1994 (through 2018). This long-term data underscores mid-caps’ potential for delivering strong returns relative to the risk taken, often exhibiting enhanced risk-adjusted returns.

However, recent performance has seen a shift, with the S&P 500 outperforming both small and mid-caps in the last five years. This outperformance in large-cap stocks was particularly pronounced after March 2020, coinciding with the Federal Reserve’s interest rate cuts that significantly benefited high-growth technology stocks, a large component of the S&P 500. Despite this recent divergence, the longer-term historical data still highlights the compelling risk-adjusted return potential of mid-cap investments over extended periods.

The Sweet Spot: Balancing Growth and Stability

Mid-cap stocks occupy a unique middle ground, offering a balance between the high growth potential of small caps and the relative stability of large caps. MSCI notes that mid-caps provide higher growth potential than large caps with more stability than small caps. These companies are often in a significant expansion phase, possessing the agility to pursue growth while having established a degree of operational maturity. SPDR supports this, describing mid-caps as nimble with high growth potential alongside more established management. This blend positions mid-caps as attractive for investors seeking growth without the higher volatility often associated with smaller, less proven entities.

An Overlooked Opportunity: The Under-allocation of Mid-Caps

Despite their historical performance and growth profile, mid-cap stocks are frequently under-allocated in investment portfolios compared to small-caps. Data indicates similar allocation proportions despite mid-caps representing roughly twice the market capitalization of small-caps. This under-allocation, particularly in active funds, suggests a potentially overlooked segment offering opportunities for investors.

Enhancing Portfolio Diversification

Incorporating mid-cap stocks into an investment portfolio can significantly enhance diversification and potentially improve overall risk-adjusted returns. MSCI’s research indicates that including mid-caps can lead to superior risk-adjusted performance by providing exposure to a distinct market segment. SPDR’s analysis supports this, demonstrating that mid-caps can improve returns without a corresponding increase in volatility, resulting in better Sharpe and Sortino ratios compared to small caps. The inclusion of the S&P MidCap 400 in a multi-asset portfolio has been shown to offer better diversification benefits. The chart below indicates that S&P MidCap 400 currently provides a greater level of diversification out of the technology sector.

Potential Downside Risks and Volatility

While offering compelling benefits, mid-cap stocks also carry inherent risks. Compared to large-caps, they often have fewer financial resources, making them more vulnerable during economic downturns. Saxo Bank notes their generally higher volatility compared to larger companies due to their size and less established markets. They can also have a narrower focus, increasing sector-specific risks and tend to have less analyst coverage. Investors should be aware of this potentially higher volatility compared to large-caps.

Conclusion

Mid-cap stocks offer a compelling combination of historical outperformance, attractive risk-adjusted returns, significant growth potential, and valuable diversification benefits. While acknowledging recent large-cap strength and the inherent risks of the asset class, the evidence suggests that a strategic allocation to mid-caps can be a valuable component of a well-rounded investment portfolio, potentially enhancing long-term growth and overall performance.

Russell 2000^® Index: The Russell 2000^® Index measures the performance of the 2,000 smallest companies in the Russell 3000^® Index, representing the small-cap segment of the U.S. equity market. It is widely regarded as a bellwether for the U.S. economy due to its focus on smaller companies. The index is managed by FTSE Russell and is designed to provide a comprehensive and unbiased barometer for small-cap stocks.

S&P SmallCap 600^® Index: The S&P SmallCap 600^® Index seeks to measure the small-cap segment of the U.S. equity market. It includes 600 companies that meet specific inclusion criteria to ensure liquidity and financial viability. The index is designed to track companies with market capitalizations ranging from $850 million to $3.7 billion, providing a benchmark for small-sized companies.

S&P MidCap 400™ Index: The S&P MidCap 400™ Index measures the performance of 400 mid-sized companies in the U.S. equity market. It is a market-capitalization-weighted index that reflects the distinctive risk and return characteristics of mid-cap stocks. The index is designed to provide investors with a benchmark for mid-sized companies, balancing growth potential and stability.

Russell Midcap Index: An index that measures the performance of the mid-cap segment of the U.S. equity market. It includes approximately 800 of the smallest companies in the Russell 1000 Index, representing about 27% of the total market capitalization of the Russell 1000. The index is designed to provide a comprehensive and unbiased barometer for the mid-cap sector, balancing growth potential and stability. It is reconstituted annually to ensure it accurately reflects the mid-cap market segment.

Works Referenced:

Bartolini, Matthew J and SPDR Americas Research. “Mid Caps Can Make a Positive Difference in Performance.” SPDR Americas Research, n.d.

Bellucci, Louis, Hamish Preston, Aye M. Soe, and S&P Dow Jones Indices LLC. “The S&P MidCap 400: Outperformance and Potential Applications.” Report. The S&P MidCap 400: Outperformance & Potential Applications, June 2019. https://www.spglobal.com/spdji/en/documents/research/research-sp-midcap-400-outperformance-and-potential-applications.pdf.

Kayne Anderson Rudnick Investment Management. “The Case for Mid-Caps,” 2024.

Ruban, Oleg, Zoltán Nagy, Jose Menchero, and MSCI Applied Research. “Global Market Report: The Mid Cap Effect.” Report. Global Market Report, December 2012.

Saxo Bank A/S (Headquarters). “Mid-cap Stocks: What They Are and Why You Should Care,” n.d. https://www.home.saxo/learn/guides/equities/mid-cap-stocks-what-they-are-and-why-you-should-care.

This week is packed with significant economic releases. On Monday, the Federal Reserve will release the monthly change in the total value of outstanding consumer credit, providing insights into consumer borrowing trends. Tuesday will see the American Petroleum Institute reporting inventory levels of crude oil, petrol, and distillate, which are crucial indicators for the energy market. The Federal Open Market Committee (FOMC) meeting minutes will be published on Wednesday, offering a detailed account of the discussions and decisions made during the latest policy meeting. Thursday brings the initial jobless claims and Core Consumer Price Index (CPI) data, both of which are key indicators of the labor market and inflation trends. Finally, on Friday, the Core Producer Price Index (PPI) and Michigan Consumer Expectations will be released, shedding light on producer inflation and consumer sentiment, respectively. This array of data will provide a comprehensive view of the current economic landscape.

This content was developed by Cambridge from sources believed to be reliable. This content is provided for informational purposes only and should not be construed or acted upon as individualized investment advice. It should not be considered a recommendation or solicitation. Information is subject to change. Any forward-looking statements are based on assumptions, may not materialize, and are subject to revision without notice. The information in this material is not intended as tax or legal advice.

Investing involves risk. Depending on the different types of investments there may be varying degrees of risk. Socially responsible investing does not guarantee any amount of success. Clients and prospective clients should be prepared to bear investment loss including loss of original principal. Indices mentioned are unmanaged and cannot be invested into directly. Past performance is not a guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange.

Securities offered through Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC, and investment advisory services offered through Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser. Both are wholly-owned subsidiaries of Cambridge Investment Group, Inc. V.CIR.0425-1380

Week in Review…

Market indices closed the week lower as markets grappled with weakening consumer confidence and April 2 tariffs on automotives.

• The S&P 500 declined by -1.53%
• The Dow Jones Industrial Average declined by –0.96%
• The tech-heavy Nasdaq performed worst, falling –2.59%
• The 10-Year Treasury yield closed at 4.25%

Last week’s economic reports painted a complex picture, with persistent inflation concerns taking center stage. Specifically, core personal consumption expenditures (PCE), the Federal Reserve’s (Fed) favored inflation gauge, exceeded expectations at 0.4% month-over-month (versus 0.3%), signaling stubborn price pressures above the 2% target. Crucially, unlike the fixed-weight consumer price index (CPI), PCE adjusts for consumer behavior, making it a key Fed indicator. Further reinforcing inflation concerns, the University of Michigan revised its 1- and 3-year inflation expectations upward from already elevated levels. While the 7-year Treasury yield saw a slight increase, potentially reflecting these rising expectations, the 2- and 5-year yields declined, creating a mixed yield curve signal.

Shifting focus to consumer health, sentiment weakened noticeably. The Conference Board’s Consumer Confidence report fell short of expectations for the fifth consecutive month, albeit with potential for upward revisions. The University of Michigan’s sentiment index confirmed this trend, plunging 12% in February, with the expectations component dropping a precipitous 18% (and over 30% since November 2024). Personal spending also came in below forecasts (0.4% versus 0.5%), suggesting a potential pullback in consumer demand.

Meanwhile, business activity offered conflicting signals. Services Purchasing Managers’ Index (PMI) exceeded expectations, indicating strength in a crucial economic sector. However, manufacturing PMI disappointed. Countering this, durable goods orders provided a positive surprise, with core orders significantly exceeding expectations at 0.7% (versus 0.2%), offering some optimism for manufacturing. While manufacturing is smaller than services, its cyclical nature makes it a valuable economic indicator.

Markets are grappling with these mixed signals amidst a backdrop of tariff uncertainty. Investors will closely scrutinize upcoming data to determine the economy’s true trajectory and the persistence of inflationary pressures.

Federal Reserve Independence: Safeguarding Economic Stability and Inflation Control

When the Federal Reserve is no longer an independent party, it can have significant implications for the market. In practice, independence means that the Fed can set interest rates without interference from Congress or the White House, even if politicians are unhappy with Fed policy and say so publicly. This independence allows the Fed to make unpopular decisions, such as raising interest rates when necessary to maintain economic stability. If the Fed loses its independence, it may face political pressures to overstimulate the economy for short-term gains, leading to higher inflation and less stable economic conditions.

Research supports the case that economies with independent central banks tend to have lower and less volatile inflation rates. For example, the European Central Bank (ECB) was established with sufficient powers to prevent inflationary expectations from becoming embedded in the economy. This independence has allowed the ECB to make difficult but necessary monetary policy decisions in pursuit of stable prices. Furthermore, as stated in a research piece called Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence, a positive relationship between the degree of independence of central banks and lower and less volatile inflation outcomes was found. This independence has contributed to a period of low macroeconomic volatility, known as the Great Moderation, where global labor supply and production capacity increased significantly, stabilizing prices and wages even in the face of strong demand. Additionally, according to Brookings, political interference in monetary policy can generate undesirable boom-bust cycles, ultimately leading to a less stable economy and higher inflation.

Flowchart of the Fed’s Mandates Impacting Individual Americans

Congress has given the Federal Reserve operational independence to ensure that monetary policy decisions are long-term, data-driven, and objectively analyzed to best serve all Americans. Despite this independence, the Fed remains accountable to Congress and the public through transparent communications. For instance, the Fed Chair testifies before congressional committees twice a year on economic developments and the Fed’s actions to promote maximum employment and stable prices. Ending the Fed’s independence could result in short-term bouts of inflation and deflation, but in the long run, prices might remain stable. However, massive borrowing could spark significant economic challenges. Investors and advisors must be aware of these risks and consider strategies that can adapt to the evolving market conditions.

The labor market will be a central theme this week, particularly following the Federal Reserve’s recent emphasis on its strength. Investors are keen to see if this trend continues, and several key reports will provide critical insights.

• Tuesday: The Bureau of Labor Statistics releases the February Job Openings and Labor Turnover Survey (JOLTS) report, offering detailed data on job openings, hires, and separations, which are essential for understanding labor market dynamics.
• Wednesday: The ADP Nonfarm Payroll report provides an early, though sometimes divergent, preview of the broader employment picture. Market reactions to this report may be subdued, however, as investors await Friday’s more comprehensive data.
• Friday: The market will digest a slew of major jobs reports, including Nonfarm Payrolls, Average Hourly Earnings, and the Unemployment Rate. The projected uptick in the unemployment rate to 4.2% will be closely watched, and any deviations could significantly impact market projections.
• Friday (later): Federal Reserve Chairman Jerome Powell’s speech will be intensely scrutinized for clues regarding future monetary policy.

In addition to the labor market data, several PMI reports will offer valuable insights into the broader economy:

• Monday: The Chicago PMI will be released, providing an early glimpse into regional manufacturing activity.
• Throughout the Week: S&P Global will finalize its March manufacturing and services PMI numbers, and the ISM Manufacturing and Services PMI will also be released.
• Key Focus: The ISM Prices component within these indices will be closely monitored as an indicator of inflationary pressures. This survey data will help markets better understand the overall direction of the economy.

Taken together, this week’s data releases and Fed commentary will provide a clearer picture of the economy’s current trajectory and inform market expectations for the months ahead.

This content was developed by Cambridge from sources believed to be reliable. This content is provided for informational purposes only and should not be construed or acted upon as individualized investment advice. It should not be considered a recommendation or solicitation. Information is subject to change. Any forward-looking statements are based on assumptions, may not materialize, and are subject to revision without notice. The information in this material is not intended as tax or legal advice.

Investing involves risk. Depending on the different types of investments there may be varying degrees of risk. Socially responsible investing does not guarantee any amount of success. Clients and prospective clients should be prepared to bear investment loss including loss of original principal. Indices mentioned are unmanaged and cannot be invested into directly. Past performance is not a guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange.

Securities offered through Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC, and investment advisory services offered through Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser. Both are wholly-owned subsidiaries of Cambridge Investment Group, Inc. V.CIR.0325-1292

Gold in Modern Portfolios: Balancing Diversification, Inflation Hedging, and Safe Haven Potential

I. Introduction: Gold’s Enduring Appeal

Gold has long been valued in finance as both a currency and a store of value. Its qualities – durability, scarcity, divisibility, and fungibility – have cemented its historical status. In modern portfolios, gold is considered for diversification and hedging, but its role as a “safe haven” requires nuance. This article explores gold’s significance, diversification benefits, its role as an inflation hedge, its long-term performance, and portfolio allocation, acknowledging investor profiles, market conditions, and the limitations of gold as a safe haven.

II. Diversification Benefits and Modern Portfolio Theory

Gold’s inclusion in a diversified portfolio aligns with Modern Portfolio Theory (MPT), which suggests that an optimal portfolio maximizes expected returns for a given risk level. Gold’s unique characteristics, 

IV. A Nuanced View of Its Safe-Haven Status

Gold has shown strong long-term performance, and its ability to preserve wealth and purchasing power makes it a consideration for long-term investment strategies. However, the perception of gold as a “safe haven” requires a nuanced perspective.

Research by Baur and McDermott (2009) highlights that gold can serve as both a hedge and a safe haven for major European stock markets and the U.S., but not necessarily for other developed or emerging markets. The study distinguishes between weak and strong forms of a safe haven, suggesting gold may act as a stabilizing force by reducing losses during extreme negative market shocks, but this effect is more pronounced in developed markets. The chart below reveals gold’s performance in U.S. equity drawdowns of 15% or greater.

Further analysis by Kuck (2019) reveals that while gold doesn’t move in tandem with stocks, it can exhibit significantly higher volatility in response to negative shocks in the equity market, and this increased volatility can contribute to the risk of a portfolio composed of both gold and equities. The study emphasizes that the effectiveness of gold as a safe haven depends not only on its return behavior but also on its volatility dynamics.

Moreover, the safe haven property of gold is not stable over time. The relationship between gold and equity markets can vary depending on market conditions. During certain periods, gold may act as a hedge, while in others, it may co-move with equities, reducing its effectiveness as a safe haven. This variability underscores the importance of understanding the dynamic nature of correlations between gold and other assets.

While gold can provide some protection during market downturns, it is not an infallible safe haven. Investors should be aware of the potential for increased volatility and the changing nature of gold’s relationship with equity markets.

V. Portfolio Allocation: Tailoring Gold to Individual Needs

Determining the optimal percentage of gold allocation in a portfolio depends on various factors, including risk tolerance, investment objectives, and time horizon. Recommendations from different financial institutions suggest allocations ranging from 5% to 15%, as a modest allocation of 5% to 10% can provide diversification benefits without overly exposing the portfolio to gold’s inherent volatility. Gold’s allocation should be tailored to individual investment goals and market conditions. Investors should periodically review their portfolio to ensure that the gold allocation remains aligned with their overall strategy and risk tolerance.

VI. Conclusion: Gold’s Role in a Balanced Portfolio

Gold remains a unique asset class with a distinct role in investment portfolios. Its dual nature as both a commodity and currency, coupled with its potential to hedge against inflation and diversify portfolios, makes it a consideration for investors. However, it’s crucial to acknowledge that while it can offer some resilience, particularly in certain market conditions, it is not a guaranteed safe haven. A balanced approach to incorporating gold into a portfolio, considering both its potential benefits and limitations, is essential for effective risk management.

Works Referenced:

Arnott, Amy C. “How to Use Gold in Your Portfolio.” Morningstar, Inc., February 27, 2024. Accessed March 20, 2025. https://www.morningstar.com/portfolios/how-use-gold-your-portfolio.

Baur, Dirk G., and Thomas K. McDermott. “Is Gold a Safe Haven? International Evidence.” Journal of Banking & Finance 34, no. 8 (2009). http://ssrn.com/abstract=1516838.

Kuck, Konstantin. “Gold and the S&P500: An Analysis of the Return and Volatility Relationship,” August 19, 2019.

Merk, Axel. “The Case for Gold: Optimal Portfolio Allocation.” Report. Merk Investments LLC, 2014.

SPDR^® Gold Strategy Team. “The Role of Gold in Today’s Global Multi-Asset Portfolio,” n.d. https://www.ssga.com/library-content/pdfs/etf/us/b30-spdr-the-role-of-gold-in-todays-global-multi-asset-portfolio.pdf.

The Perth Mint. “Gold’s Role in a Modern Portfolio – Why Now Is the Time to Invest in Gold.” The Perth Mint, 2023.

Tiempo Capital. “The Future of Gold: Understanding Gold as a Strategic Asset in Portfolios,” 2024.

Following the Federal Reserve’s decision to maintain interest rates this week, the market is poised for a week of critical economic indicators and data releases. The Fed’s outlook, which suggests a potential 50-basis-point cut by year’s end, has set the stage for heightened attention to inflation metrics – particularly the impact of tariffs on prices. The Fed Chair described the influence of tariffs as transitory, indicating that any significant effects may not be immediately evident.

The upcoming Personal Consumption Expenditures (PCE) data, set to be released on Friday, is unlikely to reflect substantial changes stemming from tariffs in the short term. This will be closely monitored by analysts and investors alike, as it could influence perceptions of inflation trends moving forward. Additionally, the state of consumer confidence will be another focal point, especially after a steep decline last month. Observers will be eager to see if confidence improves amid ongoing economic uncertainty, as this could impact consumer spending and overall economic activity.

On Monday, the Manufacturing Purchasing Managers’ Index (PMI) and Services PMI will be announced, providing insight into the health of these critical sectors. These indices are essential for gauging economic expansion and overall activity, which could be influenced by both consumer sentiment and inflation expectations.

Finally, on Thursday, the final estimate of Q4 gross domestic product (GDP) will be released, with market participants alert for any significant revisions from previous estimates. Any notable changes could have implications for economic strategies and Fed policy considerations moving forward.

This content was developed by Cambridge from sources believed to be reliable. This content is provided for informational purposes only and should not be construed or acted upon as individualized investment advice. It should not be considered a recommendation or solicitation. Information is subject to change. Any forward-looking statements are based on assumptions, may not materialize, and are subject to revision without notice. The information in this material is not intended as tax or legal advice.

Investing involves risk. Depending on the different types of investments there may be varying degrees of risk. Socially responsible investing does not guarantee any amount of success. Clients and prospective clients should be prepared to bear investment loss including loss of original principal. Indices mentioned are unmanaged and cannot be invested into directly. Past performance is not a guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange.