I’m pleased to share an update on recent market developments and the strategic positioning of Portfolio Shield™ for April 2026.
The decision to hedge the equity allocation with short-term Treasuries proved beneficial in February. However, our subsequent move to switch the hedge to long-term bonds while shifting the bond allocation to intermediate-term bonds has proven premature, as short-term interest rates have risen in recent weeks.
We are now entering what could be a particularly challenging period for both portfolio managers and investors. Two distinct negative forces are converging on the markets:
First, we are experiencing the largest oil shock in decades, triggered by disruptions tied to the ongoing conflict in the Middle East. Sustained high oil prices increase the risk of a recession—the longer they persist, the greater the threat. History is instructive here: four of the five U.S. recessions since the 1970s were preceded by major oil shocks.
Compounding this is an economy that was already showing signs of strain before the conflict escalated. Consumers had begun pulling back on spending as wage growth failed to keep pace with inflation, and the labor market has weakened meaningfully. The net number of jobs created over the past ten months has turned negative, according to recent BLS Nonfarm Payroll reports.
For businesses, tariffs have squeezed margins, forcing many to contemplate passing on higher costs to customers who are already stretched. At the same time, companies are likely to cut staff and hours further in an effort to protect profitability.
Second, these pressures are pushing the economy toward stagflation—a toxic mix of rising prices, slowing growth, and increasing unemployment. The latest S&P Global flash PMI surveys for March confirm we are in the early stages of this dynamic, with business activity slowing (particularly in services) while input costs and selling prices have spiked amid energy-driven supply pressures.
The likely outcome of either an extended oil shock or entrenched stagflation is a recession and a bear market in equities. In more severe cases, as seen in 2008, this can escalate into a broader financial crisis.
Navigating the early phase of an oil shock that is amplifying the stagflationary signals we observed a few months ago is inherently difficult. Historically, both stocks and interest rates tend to decline in these environments. The immediate challenge is that we are currently seeing a short-term rise in rates, even as longer-term pressures point lower. Timing these shifts with precision is impossible.
Move too early (as we did with duration extension), and you must wait patiently for the market to recognize that slowing growth will eventually ease inflationary pressures.
Move too late, and you risk missing the sharp initial rally in bonds that often occurs once the market and policymakers acknowledge they are behind the curve.
At the start of the month, based on all available information, I believed extending the duration of both the hedge and the bond allocation was the most prudent step to mitigate downside risk from a potential bear market—or worse, a financial crisis.
What changed was the messaging from central bankers, who indicated they might need to raise rates in response to the supply shock. Markets have taken them at their word for now, even though one or two weaker payroll reports could quickly shift expectations back toward easing.
In hindsight, the better decision would have been to maintain the shorter-duration hedge and bond allocation in Treasuries.
In the short term, this means our strategy has not fully protected against the equity downside I correctly anticipated. That said, I continue to believe the downside risk in long-term bonds remains limited relative to that in equities.
On Tuesday, the landscape shifted meaningfully when Iranian President Masoud Pezeshkian expressed Iran’s “necessary will” to end the war, albeit while seeking guarantees and reparations. While a quick resolution remains unlikely given the positions of all parties, this development raises the possibility of negotiations and has already prompted a positive market reaction, including a relief rally in stocks and softening in oil prices.
Compounding this technical opportunity, investors and money managers have built very large short positions over the past month to protect against downside risk. In addition, several CTA and systematic strategies appear poised to flip from short to long on any sustained positive momentum. These positioning dynamics could generate meaningful upward pressure and potentially amplify any near-term rally in equities.
Adding to the short-term constructive backdrop, the recent Conference Board Consumer Confidence survey showed improving views on the labor market, which was reinforced on Wednesday by the ADP payroll report. Despite higher energy prices, retail sales rose to their highest level in eight months, supported by tax refund-driven spending. In the near term, this pickup in consumer optimism and spending is likely to be viewed as bullish for equities.
Given this shift in the short-term opportunity set, I have decided to remove the equity hedge for the month of April. This tactical adjustment allows Portfolio Shield™ to participate in potential upside. The bond allocation will switch to high yield bonds for April. We will continue to monitor market conditions closely and stand ready to reinstate the equity hedge promptly if downside risks reassert themselves. A minimal cash position of approximately 0.3% will be maintained across all models.
It should be noted that regardless of market conditions, the strategy was designed to hold an equity allocation as it is not designed to time markets but to hedge downside risks.
Utilizing the latest Artificial Intelligence tools, I have been working diligently to build out the optimization engine to determine what is the optimal design for equity allocation, bond allocation, and hedging mechanism.
We tested different time windows for measuring volatility and momentum across the 2020-2025 period. Our optimization found that using a shorter volatility window with a longer return lookback provides better risk-adjusted returns. This allows the strategy to react more quickly to changing market conditions while still capturing meaningful trends.
We tested multiple approaches for when to include protective assets, from long-term Treasuries (as it is now), to gold, the dollar and even inverse-like funds, in the portfolio when it hedges. Our optimization found that the existing hedge was still the best choice but by adding gold when long-term bonds didn’t qualify, it provided better downside protection.
For the fixed income portion, we optimized how we choose between Intermediate-Term Treasury Bonds, high-yield bonds, or Short-Term Treasury Bills. We determined that a dynamic bond selection utilizing a dual momentum strategy adapts to interest rate and credit conditions better, generates higher returns and lower drawdowns.
We have started implementing these improvements.
As a reminder, all Portfolio Shield™ models are rebalanced on the first trading day of each month, and new funds received are invested according to your selected model at that time. If you wish to adjust your strategy or risk level, please contact us before the next rebalance. Accounts with a zero balance for six consecutive months may be closed, and the associated advisory agreement terminated.
We remain fully committed to your financial success. Please don’t hesitate to reach out with questions, to discuss your Portfolio Shield™ strategy, or to inform us of any changes in your financial situation or objectives so we can continue providing the most suitable guidance.
Thank you for your continued trust. We are dedicated to managing your Portfolio Shield™ with discipline and care as we work together toward your long-term financial goals.
Steven Van Metre
