Portfolio Shield – March 2023

Jeff and I continue to believe that stocks are likely to rally over the next several months as the stock market historically moves based on the anticipated direction of the Federal Funds Rate rather than the underlying economic fundamentals. Our base case remains that stocks are likely to go higher when the market believes the Fed will stop raising the Federal Funds Rate.

We also believe that bond prices are likely to go higher, particularly on the long end of the curve, as growth and inflation expectations continue to slow.

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 through the end of May.

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

January economic data was far better than had been expected, particularly after serious deterioration in November and December. That, however, accounts for much of the “improvement” as in the short run any economic account will be noisy, more so during periods when results deviate from prior trends as they did to end last year.

There were also seasonal factors (the lingering reverse from what was once called “residual seasonality”) to consider especially January US payrolls and retail sales.

Official reaction to those releases (along with the US and other national CPIs) was instantaneous, policymakers immediately expressing their preference to err on the side of what they consider potential further “inflation” risks, focused on what was in the last CPI while missing all the more relevant factors for what will drive future consumer prices.

Those begin with the inventory cycle which in January (likely February) shifted into its next stage in which inventories are purposefully being worked down (as opposed to last year when inventory growth was constrained, still leading to a dramatic production slowdown), more goods will end up being discounted and unsold stocks liquidated further reducing general goods prices.

Next, crude oil which government data shows faced an abrupt and near-historic surge of domestic inventories. Since there was no new supply that oil could have only come from much-reduced demand here and abroad (Asia, in particular) just as the WTI curve had anticipated and priced. Demand imbalance with supply means lower oil therefore gasoline ahead (taking account of non-economic factors).

Finally, housing and rental prices are falling. The latter make up a part of “shelter” costs in the CPI (and deflator), while the former is imputed into Owners’ Equivalent Rent, both together representing the single-largest upward influence for consumer price measures. Real estate values have been shown to drive both – combined making up nearly a third of the CPI consumer bucket – with a lag of around 12 to 18 months, meaning by mid-year shelter “inflation” will diminish before it reverses getting into next year.

Considering, too, weakness across the global economy starting with a trade recession, consumer price pressures are going to be heading even lower over the months ahead regardless of the numbers put out recently. This is one reason why curves remain highly inverted, anticipating that outcome as well as why it is likely to happen – recession.

So long as current CPIs (and employment data) remain outside the Fed’s comfort zone (undefined), rate hikes will continue regardless if only in the short run.

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

Looking ahead the strategy will likely remain unhedged through the end of May. June will be the first month where there is a possibility the strategy will hedge with long-term bonds.

The Growth, Balanced, Income, and Conservative models have dropped their position in HYG and IEF for the bond allocation for March and replaced them with AGG.

Based on the current one-month momentum screen applied to the bond allocation, the strategy recommends removing both HYG and IEF from the allocation for the month. It is likely that in the coming months, momentum will change and one or both of the funds will return to the strategy.

Overall we are pleased to see the implementation of the one-month momentum screen to the bond allocation had a positive impact on the returns of the bond allocation.

We will continue to run the additional one-month 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