This is Important!
If you are a long-time member of our WSG family, you might remember the monthly update I did back in October 2002, titled “The Wicked Witch is Dead”. (You can read it here)
Of course, I was referencing the end of the “Tech Wreck”, which for the few people who added cash to the invest side of their net worth did benefit from that decision.
On a few occasions of very high volatility in the valuation of Corporate America, much like now, I have shared the updates on our own WSG “Exit Strategy”. (You can read it here)
Since 9/18/2020, I have written in The Weekly Update, posted to our website every Friday (except for that one time), I have suggested with quantifiable source-cited facts that inflation was far from “transitory” and we all needed to prepare for inflation and for years, not months. (Read them all here, The Weekly Update 4/15/2022).
In preparation for that inflation outlook, I made a very difficult decision to allocate as much as 10% of our asset allocation to energy, starting as early as March of 2020 when the price of oil was -$30.00 per barrel at the start of the Covid economic shutdown.
Later we added soft commodity investments (think food, lumber, etc.), precious metals and healthcare, which tend to be inflation protection investments.
As the economic data flow started to get less consistent in early 2022, before the Russia/Ukraine war starting on February 14, 2022, we increased our cash from a few percent of the total allocation to as high as 25%+, depending on the client.
As I write this on June 15, 2022, the U.S. Federal Reserve has just increased the Fed Funds interest rate by .75% from 1% to 1.75%. They intend to increase at least a few more times before the mid-term elections from the current 1% Fed Funds rate to 3.80%. That is a lot!
In addition, they are reducing the size of their balance for the first time in history, read between the lines, errors possible, so a real-time experiment in slowing our “hot” inflated economy.
Combined, these two actions have the potential to slow our once “cookin’” economy into a sudden recession. The definition of a recession is two consecutive quarters of contracting Gross Domestic Product (GDP). 1Q22 GDP was negative and 2Q22 will not be known for a few months.
In the monthly update I write, The Seven Signs of a Changing Economy™, Sign #3 is The Conference Board’s Leading Economic Index (LEI). The LEI has an impressive history of suggesting what the economic backdrop that Corporate America will be operating in six to nine months into the future, i.e., December 2022 to March 2023 will look like. Last month, it was flat YTD, i.e., suggesting zero growth from here, which is a tiny step from (GDP) contraction.
There are some very positive and encouraging signs to support the current valuations of Corporate America, as measured by the S&P 500, but considering these headwinds, I will remind all of us of a few core themes that have served me, and our client family, well for over forty years.
- To not make our client family poor
Thus, on June 14, 2022, we once again liquidated some investment positions in our asset allocations to increase cash levels, as a shock absorber.
- Don’t Fight the Fed (from Marty Zweig)
As noted above, each increase in interest rates will likely add more downside pressure to valuations.
- The Trend is your Friend (also Marty Zweig)
As we entered June 14, 2022, the S&P 500 had officially entered a negative price trend (Bear) market, which is defined as down 20% from the prior peak.
- No one knows the future
Of course, you have all heard me us this phrase, along with the others, in our meetings and calls.
Conclusion: Since January when we first raised cash levels, to now reducing positions to add even more cash cushion, there has been less clarity on what is next.
With what is likely to be a bitter mud-slinging pre-midterm election season just ahead, and in the spirit of “Don’t make me poor”, we will now hold large cash positions with the intent to systematically reallocate as we roll up to and past November 8, 2022.
There are “always” opportunities to get nice returns in some sector of the marketplace, over time and with patience. In fact, positions that will be initiated in our allocations could prove to be outstanding performers in the next few years.
At the WSG, we remain focused on thoughtful and reasonable next steps that work to the best advantage for each WSG family member within their constraints for time, risk and volatility, of course.
I’m interested in your thoughts, comments and observations. Feel welcome to call, email or stop by the office and say Hi.
James O. Lunney, CFP®
CERTIFIED FINANCIAL PLANNER™ Professional
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Investing involves risk including loss of principal. No strategy assures success or protects against loss.