Portfolio Management in Today's Environment

Wise investors know that it’s time in the market, as opposed to market timing, that drives long-term wealth creation.  Our client portfolios are managed with the full perspective of each client’s personal and financial needs, which is incredibly important while navigating the stock market’s inherent volatility.  While your goals, priorities and timelines are the main driver of our investment strategies, we always remain mindful of external market conditions.  With that said, as the current economic expansion enters its 96th month of growth – the third longest streak on record – is it time to take some risk off the table? 

Since the mid-2009 recovery began, the U.S. has grown an average of roughly 2 percent annually.  This is well below the 3.6 percent annual rate during the economic expansion from 1991 to 2001.  Given this sluggish growth, it might just be possible to surpass the longest business expansion on record – 120 months.  It won’t be easy however since the economy is much closer to, if not already at, full employment. 

But what might trigger a recession (and subsequent pullback in the stock market)?

The Federal Reserve’s interest rate strategy will play a significant role over the next few years.  If the Fed raises interest rates more quickly and aggressively than what’s priced into financial markets, we believe stocks might encounter some turbulence.  Therefore, it’s imperative for policymakers to continue tightening at a steady, measured pace.  Even without any surprises on the interest rate front, however, a 5 percent to 10 percent correction in the stock market would be well within the norms of a typical correction.  As seen in the chart below, there are intra-year pullbacks in the market every calendar year.

In light of a potential recession or market pullback, we believe our current portfolio strategy is designed to mitigate several of the risks that would accompany a slowdown in economic activity:

Earnings Recession –

  • The bulk of our fixed income exposure serves as an anchor to windward. We prefer high-quality bonds, often backed by the US Treasury or with top investment grade ratings.

  • We have slowly shifted equity exposure towards international markets and away from the US, where profit margins have fully recovered and pent-up demand is becoming exhausted.

Rising Rates –

  • While many investors believe there is no alternative to stocks given low interest rates, it is obvious that higher rates could change their mindset. With that in mind, we have kept our bond maturities short so rising rates offer opportunity for higher coupons without material losses.

  • Interest rates rise for one of two reasons – faster economic growth or higher inflation. We own small cap and value stocks because they are more responsive to economic growth. As for combating inflation, we own TIPs – especially the shorter-term variety which are more responsive to inflation – and floating rate notes, which protect against rate rises (since coupons are tethered to variable short-term rates).

Valuation –

  • To hedge against the risk that stock valuations are getting extended, we periodically rebalance back to your asset allocation targets, which provides for diversification from having too many of your eggs in one basket.

  • We favor high quality stocks and take a close look at index construction. For instance, because small cap stocks have less access to financing, we prefer to own ones with better balance sheets by using indices that screen out unprofitable firms.

  • We overweight value stocks, which over most lengthy time periods tend to do better than growth stocks. Currently, value stocks are trading at deep discounts compared to typical valuations, especially overseas (see chart below). If you believe in buying low and selling high, now is the time to begin accumulating a position for the subsequent reversal.

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While we would welcome any eventual pullback that gives us the chance to earn higher returns on future cash to be deployed, we don’t need to wait for such an opportunity to take advantage of volatility.  With the market at all-time highs, it might be appropriate to reach out to your financial planner to discuss any pending needs for cash that you might have in the next 6 to 12 months, including new cars, tuition, or home renovation projects. 

For clients exploring gifting or charitable giving strategies, now is a good time to consider gifting highly-appreciated stock (to avoid the tax bill) or setting up a donor advised fund for long-term charitable giving with immediate tax deductions.

Just to be clear, we are not predicting an imminent market crash or making sweeping changes to your portfolios, but we want to communicate some concrete ways in which we have positioned your investments to succeed in a more difficult environment.  As we always stress in our partnership with each client, being proactive and contacting your Wealthcare360™ advisor about your cash flow situation is always beneficial as we manage your portfolio. 

Please reach out with any questions and always know that we are watching over your portfolio and financial goals from the perspective of your trusted fiduciary!






Mike Giefer