Touchstone Asset Allocation Guidance

We believe we can add value by adjusting portfolio weights in response to changing market conditions and in anticipation of changing fundamentals. History demonstrates that risk assets move through repeated boom and bust cycles. While the economic cycle influences these cycles, they do not necessarily overlap with the risk asset cycle.

By Touchstone Asset Allocation Committee

Economy & Markets

Executive Summary

Last month we viewed the Fed’s decision to begin its rate-cutting cycle with a more aggressive 50 basis point reduction instead of 25 basis points as a positive. This larger cut helped alleviate concerns about weakening economic conditions.
However, following the cut, stronger than expected economic reports emerged, casting doubt on whether a larger rate reduction was necessary. Since the rate cut, long-term bond yields have risen. It’s unclear if this rise was due solely to fears that the Fed went too far or concerns about the upcoming election – maybe both.
We have maintained a slight equity and home bias in our tactical positioning. We do have an important election in front of us and its outcome and new congressional makeup could prompt changes in our positioning.

Download Touchstone Asset Allocation Guidance (PDF)

Fixed Income

Weight: Slight Underweight
Last month, we suggested that much of the yield curve seemed to expect faster rate cuts than the Fed might deliver. Since then, apart from the shortest maturities, yields have moved to more reasonable levels, given our economic and inflation expectations

U.S. Taxable Investment Grade
Weight: Slight Underweight
Last month we added to our underweight to fund an increase in small-cap equities. Our decision was not due to concerns with investment-grade bonds, but rather the belief that there are greater return

Duration
Weight: Neutral
Following the Fed’s rate cut, we removed our slight duration overweight. While longer-term rates have increased, we now view the risks of rates moving either higher or lower from this point as relatively balanced.

U.S. Taxable Non-Investment Grade
Weight: Slight Overweight
High-yield bonds have performed well despite higher interest rates, thanks to economic resilience, a lower maturity wall, and higher index quality. We believe the Fed’s easing cycle will incent investors to move into higher-yielding securities.

Equities

Weight: Slight Overweight

Although there are pockets of weakness, the overall economy remains strong. With the Fed now easing, we have become slightly more attracted to domestic equities, particularly those that are undervalued and more likely to benefit from lower interest rates.

U.S. Large Cap
Weight: Neutral
Second-half earnings comparisons should remain favorable, leading to continued earnings beats. However, the 2025 earnings outlook may be more challenging. For large-cap stocks, AI spending is expected to play a crucial role in sustaining earnings growth.

Growth
Weight: Moderate Underweight
We remain underweight Growth equities due to the high idiosyncratic risk among its top constituents and their elevated valuations. The Russell 1000 Growth Index trades at 28x estimated 2025 EPS, compared to 21x for the S&P 500 and 17x the S&P 500 equal weighted index.

Value
Weight: Slight Overweight
Value stocks have trailed the broad index, but it has not been due to style-specific issues. A few exceptionally large names continue to drive market returns, and they happen to be Growth stocks. Excluding these, the Value index has performed in line with the broader market.

U.S. Mid Cap
Weight: Modest Overweight
Mid caps have generated solid returns with the S&P 400 Index up over 14% year-to-date through October 28. However, these gains have been driven mainly by multiple expansion, with earnings lagging. We are maintaining our overweight position, anticipating higher earnings growth in 2025 and beyond.

U.S. Small Cap
Weight: Slight Overweight
The Fed’s dovish rate cut prompted us to assess which asset class would benefit the most from lower interest rates. Small caps topped the list. They have been hit hardest by rising rates and are now attractively valued, making them well-positioned to benefit from easing.

International Developed
Weight: Slight Underweight
In Europe, we had expected to see green shoots by now, but instead, economic weakness continues, and earnings estimates are being revised downward. While China’s recent stimulus measures may offer some relief, we are maintaining our slight underweight.

International Emerging
Weight: Neutral
The combination of the Fed’s 50bps cut and China’s increased stimulus efforts has improved the prospects for emerging markets. However, we plan to stay neutral for now, awaiting election results, given the potential risk of new tariffs.

Strategic: Strategic asset allocation is a baseline allocation between asset classes established with a longer term focus and congruent with an investor’s investment goals and objectives. The allocation is meant to optimize the asset mix through methodical diversification in an attempt to maximize return and lessen risk.

Tactical: Tactical asset allocation is differentiated from strategic asset allocation by having a much shorter time horizon and the goal of adding alpha beyond what would be allowed through static strategic weights. Markets tend to be more volatile over shorter time horizons, while longer time frames tend to smooth out that volatility. That enhanced volatility in the short term creates the opportunity for either return enhancement and/or risk reduction by adding to or reducing weights of different asset classes.

About the Author

Touchstone Asset Allocation Committee

The Touchstone Asset Allocation Committee (TAAC) consisting of Richard “Crit” Thomas, CFA, CAIA – Global Market Strategist, Erik M. Aarts, CIMA - Vice President and Senior Fixed Income Strategist, and Brian Cheyne, CFA, CIMA - Senior Investment Strategy Specialist, develops in-depth asset allocation guidance using established and evolving methodologies, inputs and analysis and communicates its methods, findings and guidance to stakeholders. TAAC uses different approaches in its development of Strategic Allocation and Tactical Allocation that are designed to add value for financial professionals and their clients. TAAC meets regularly to assess market conditions and conducts deep dive analyses on specific asset classes which is delivered via the Asset Allocation Summary document. Please contact your Touchstone representative or call 800-638-8194 for more information.

Word About Risk
Fixed-income securities can experience reduced liquidity during certain market events, lose their value as interest rates rise and are subject to credit risk which is the risk of deterioration in the financial condition of an issuer and/or general economic conditions that can cause the issuer to not make timely payments of principal and interest also causing the securities to decline in value and an investor can lose principal. When interest rates rise, the price of debt securities generally falls. Longer term securities are generally more volatile. Investment grade debt securities may be downgraded by a Nationally Recognized Statistical Rating Organization to below investment grade status. Non-investment grade debt securities are considered speculative with respect to the issuers' ability to make timely payments of interest and principal, may lack liquidity and has had more frequent and larger price changes than other debt securities. Equities are subject to market volatility and loss. Growth stocks may be more volatile than investing in other stocks and may underperform when value investing is in favor. Value stocks may not appreciate in value as anticipated or may experience a decline in value. Stocks of large-cap companies may be unable to respond quickly to new competitive challenges. Stocks of small- and mid-cap companies may be subject to more erratic market movements than stocks of larger, more established companies. Investments in foreign, and emerging market securities carry the associated risks of economic and political instability, market liquidity, currency volatility and accounting standards that differ from those of U.S. markets and may offer less protection to investors. The risks associated with investing in foreign markets are magnified in emerging markets, due to their smaller and less developed economies.

Index Definitions
S&P 600^® Index is an unmanaged index considered representative of U.S. small-capitalization stocks.
S&P 500^® Index is a group of 500 widely held stocks and is commonly regarded to be representative of the large capitalization stock universe.
Bloomberg U.S. Aggregate Bond Index is an unmanaged index comprised of U.S. investment grade, fixed rate bond market securities, included in government agency, corporate and mortgage-backed securities between one and ten years.
Alpha is the portion of a fund’s total return that is unique to that fund and is independent of movements in the benchmark

In accordance with Rule 22c-2 under the 1940 Act, Touchstone Funds has no arrangements to permit any investor to trade frequently in shares of the Funds, nor will they enter into any such arrangement in the future.
Fed is abbreviated for the U.S. Federal Reserve Board.
AI is abbreviated for artificial intelligence.

The information provided reflects the research and opinion of Touchstone Investments as of the date indicated, and is subject to change without prior notice. Past performance is not indicative of future results. There is no assurance any of the trends mentioned will continue or forecasts will occur. Investing in certain sectors may involve additional risks and may not be appropriate for all investors.

The indexes mentioned are unmanaged statistical composites of stock or bond market performance. Investing in an index is not possible.

Please consider the investment objectives, risks, charges and expenses of the fund carefully before investing. The prospectus and the summary prospectus contain this and other information about the Fund. To obtain a prospectus or a summary prospectus, contact your financial professional or download and/or request one on there sources section or call Touchstone at 800-638-8194. Please read the prospectus and/or summary prospectus carefully before investing.

Investment return and principal value of an investment in a Fund will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. All investing involves risk.
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