Over the past twelve months, as Fed rate hikes have taken hold, much attention has been paid to the denominator effect. This is the impact on investors’ portfolios as liquid asset prices have fallen, creating larger-than-anticipated allocations in other areas.

For many the over-sized shares are coming in alternatives. Institutional investors set limits based on policy and risk considerations. Exceeding them, particularly with illiquids, creates challenges not easy to address. Selling non-traded assets or buying more volatile publics whose values could drop further are not great options.

Not enough discussion, in our opinion, is taking place around the numerator effect. No one questions that equities and bonds will eventually recover their values as interest rates settle down and recession worries fade. Indeed January 2023 was the top month for IG bonds since 1975 and stocks had among their best openings in over two decades.