I hope you have been enjoying this hot and dry Summer so far. It is hard to believe that Fall is around the corner and we are close to 18 months removed from COVID breaking out on US shores. It would be an understatement to say a lot has occurred over that timeframe – yet time keeps rolling by. With that said, I thought it would be useful to send out an update on markets, portfolio positioning and some things we have been doing at GMFG to support our community.
Throughout the heart of the lockdowns, we were focused on holding some cash and buying the stay at home stocks. Those decisions led to reduced drawdown in portfolios and robust participation in the ensuing market recovery. Over the course of the year – and stretching into late last year post election – we have continued to “normalize” portfolio positioning. After the election, we saw the vaccine roll-out start to take hold across the world and we rotated from some of those stay at home stocks to a portfolio that includes recovery stocks like industrials, energy, banks and materials. We have also reduced fixed income positions as yields have dropped significantly this year. Instead, we opted for high quality dividend paying stocks and added to some international positions on the back of continued stimulus spending and vaccines allowing people to get back some semblance of pre-covid life. We feel very good about where we have been and it has led to strong portfolio performance.
However, there are a few headwinds presenting themselves at the moment.
- The Delta variant is raging in unvaccinated populations and breakthrough infections have begun to occur
- Markets at all-time highs with pockets of very stretched valuations
- Inflation creeping in and likely to persist for a while
- And, the prospect of tapering from the Fed leading to higher interest rates
Based on that, we feel the time is right to take some profits in the stock market and reduce weightings to a more neutral position. We are taking profits in areas that we have solid gains to raise some cash. We have already added positions to help offset inflation and we are underweighted to fixed income that would likely see a sell off in a rising interest rate environment.
That said, we still have a cautiously optimistic view of the economy and stock market over the next 12 to 18 months. Unemployment is continuing to drop, there is still unspent stimulus money from previous rounds with anywhere from 1 to 4.5 trillion more to come and Americans have very strong household balance sheets on the whole (actually better that they had entering the pandemic). While there are worries of shutdowns stemming from the Delta variant, we feel the most likely outcome is not widespread shutdowns like we saw before – the country just doesn’t have the appetite for that. And the reality is those who wanted to get vaccinated have been and those who haven’t are likely to still move around and do things.
While the economy may slowdown in the short run as people are worried about the variant, we don’t see that persisting long enough to derail the overall economic recovery. Depending on the nature of any pullback, we would likely see that as an opportunity to put some of the cash we raised back to work in the stock market. So, in a nutshell we still feel good about the economy moving forward but feel it prudent to take some profits and raise a little cash as there are quite a few short-term headwinds.
On another note, we have been active in our community and support those that need help. We have joined in numerous fundraising activities near and dear to our hearts and those of our clients. For those of you that don’t know, Don has joined the board of Hope 4 Youth – an organization that targets youth homelessness in our local community and develops programs to fight it.
On any given night, there are more than 6,000 youth experiencing homelessness in Minnesota. When darkness sets in, these youth are staying in their cars, couch-hopping or sleeping on the streets. We are participating in The Darkest Night of Your Life 4K to both raise awareness and funds, so they never have to experience it again. It is a 4k walk/run on Friday September 17 at night and we would truly appreciate any support you are willing to give. You can help donate to the cause through our fundraising page or even better – join our team and come walk with us!
Here is a link to the page: https://give.hope4youthmn.org/teams/15977-greater-midwest-financial-group
In closing, we feel the headwinds we face in the near term will be short lived and we will get through this latest challenge we face as we have so many before. We appreciate your trust and confidence and will continue working hard and being diligent on your behalf. Enjoy the remainder of your Summer and we hope to see you at the event on September 17!
Robert J. Phillips, CFP®