Portfolio Shield – February 2023

Jeff and I believe that stocks and long-term bonds are likely to rally over the next several months especially if the market believes the Fed is soon to stop raising the Federal Funds Rate.

Portfolio Shield™ is currently positioned to take advantage of a rally 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.

The overall economic situation continues to deteriorate, in places rapidly, though the overall picture isn’t yet fully clear. As a result, while the balance of favorable to unfavorable data has tilted toward the latter it isn’t decisive. This includes consumer and producer price measures which for the most part show convincing reductions in pressures, though not complete withdrawals from “inflation.”

Recognizing as much, central banks have already begun to downshift the tempo of rate hikes along with language and communication well in advance of previous projections. Officials at the Federal Reserve, Bank of England, and European Central Bank this week made statements or released forecasts which showed each is nearing the end of their inflation-fighting sequence whether voluntary or not.

The next step will be a more determined fix on terminal benchmark rates (market rates are, obviously, an entirely different story) before sometime afterward the final shift into rate cuts (it should be pointed out that as of now none of them have expressed any plans or inclination for these). The length of time for this process beginning to end is difficult to predict since so much of it depends on trying to guess exactly when policymakers come around enough to realize risks are the opposite from what they’ve stated and assumed.

To that end, the transition is hindered by temporary lack of clarity in major economic data accounts. This week has been a perfect example of the ambiguity which plagues these periods of macro state changeover. German retail sales and global trade, both imports and exports, utterly collapsed as did the ISM’s Manufacturing numbers in the US. China’s reopening was underwhelming, though the American payroll report was a positive blowout.

Even in the labor figures, discrepancies dominate: the Establishment Survey suggested the economy is holding its own and then some, but the Household Survey continued its contrary view of employment heading headlong toward recession with full-time jobs likely lower.

Regardless, at some point the data will increasingly align then coalesce into a more uniform and unified picture of the economy, one that probably won’t be good, and if it does the entire central bank regime must shift into its final phase of lowering their benchmark rates if only to confirm the today’s bond market view. The next questions, those already beginning to be answered, are “how bad” and “how long.”

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

Looking ahead to the March, April, and May rebalances, the strategy will likely remain unhedged unless there is a large downside move in stocks.

There were very slight changes across the Growth, Balanced, Income, and Conservative models for the bond allocation for February.

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