Portfolio Shield – January 2023

Jeff and I continue to believe the most likely path is a rally in stocks and longer-term bonds over the next several months, especially should the Fed slow the pace of rate hikes. We will know more on February 1 when the Federal Open Market Committee announces its latest policy statement.

Portfolio Shield™ is positioned to take advantage of a melt-up in stocks and a decline in interest rates.

Our view of higher stock and bond prices is consistent with the projections based on the Portfolio Shield™ algorithm for the months to come which is likely to remain unhedged.

Looking forward, our Chief Strategist Jeff Snider shares his outlook on the global economy.

Market and curve shifts since June and November continue to show up across incoming macroeconomic data. Inversions which were modest prior to mid-year turned heavy into July and then grew more alarming following October. These moves pointed to worsening economic fundamentals on the ground, all being priced by participants with close contact to actual real-time developments.

Focusing on the US, the goods economy appears to have followed exactly that course. PMI data had initially signaled as much, including the December estimates from the ISM – both manufacturing and, importantly, services – though today more and more hard data is picking up the same.

Imports into the US fell sharply in November as had orders for new production from domestic factories. The inventory cycle appears to have kicked into full reverse right as market curves did.

But what’s being revealed isn’t just the pandemic economy normalizing after several years hopped up under artificial factors, a slight shift from goods spending as American consumers return to more pre-pandemic economic habits.

While the inventory cycle begins to clamp down on overall activity in retailing and behind it on the supply chain here and abroad, we are also now seeing concurrent very serious weakness throughout services. In fact, layoff announcements are concentrated in that segment. The aforementioned ISM reported for non-manufacturing industries an absolute and stunning plunge in its new orders index (down to an alarming 45.2), suggesting material deteriorating entering 2023.

Even though labor data proposes no more than a slowdown for employment growth, at best the BLS numbers are lagging – apart from CPS (HH Survey) full-time estimate which remains lower through December demonstrating genuine and ongoing caution on the part of employers. Should the economy continue to develop as it has, as markets project, the employment data will indeed “catch up.”

This, however, is not strictly an American defect nor is it a skillfully-engineered soft landing into stable normality. As curves have foreshadowed all year, the US economy in particular is heading toward at least recession.

There were very slight changes to the Portfolio Shield™ equity allocation for January.

Looking ahead to the February and March rebalances, the strategy will likely remain unhedged unless there is a large downside move in stocks. By April and on, the probability the equity strategy may hedge with long-term bonds increases.

Portfolio Shield™ added an allocation to 7-10 Year Treasuries (IEF) and reduced its position in Aggregate Bonds (AGG) across the Growth, Balanced, Income, and Conservative models for the bond allocation for January.

We will continue to run the additional momentum screen and make adjustments to the bond allocation each month for the Growth, Balanced, Income, and Conservative models based on its recommendations.

As a reminder, all strategies are rebalanced on the first trading day of each month and at that time, any new monies are invested according to the model strategy you are in.

For those who want to change between strategies, changes will occur at the next rebalance.

Zero balance accounts that have had a zero balance for six months or more will be closed and where applicable, the advisory agreement terminated.

There is only a 0.3% allocation to cash in each model. Due to a misreporting between Morningstar® and the ETF providers, the Asset Allocation box on the fact sheets may show a higher cash position than is actually in the model.

If you have any questions or would like to change which Portfolio Shield™ strategy you are invested in, please let me know.

The latest Morningstar® Investment Detail Reports for the Portfolio Shield™ family are available on the Portfolio Shield™ website.

Thank you for your continued trust in allowing us to manage your money with Portfolio Shield™.

Thank you,

Steven Van Metre, CFP®
Jeffrey Snider