A Note from Leigha A. Shepard, Founder & President, Midwest Financial Partners

June 2, 2022

We are seeing some turning points in certain areas of the markets and are making decisions to align portfolios for the changes we are seeing.

This downturn has been more challenging than some because, with interest rates rising, both stocks and bonds have fallen together with bonds, until recently, performing worse than stocks which has put additional downward pressure on portfolios.  We chose not to exit that bond exposure, however, because we purchased much of it some time ago and had locked into yields that we are unable to duplicate in the current environment and anticipated this dynamic would be relatively short lived and it looks like this thesis is starting to pan out now.  The first quarter GDP number came in negative, and we are seeing multiple signs that point to an economy that is slowing and a recession could be on the horizon.  In fact, that is the goal of the Fed in raising interest rates; to slow down the economy.  They always hope to do so without pushing it into recession, but that is an extremely difficult thing to do especially as far behind as the Fed has allowed itself to get in this cycle.

Bonds have likely priced in the number of increases the Fed said it was going to do, but our case has been that they are unlikely to be able to get that many in before the economy started to slow, and it looks like that is what is developing.  So, we think we have seen the bulk of the selling in bonds, and they are stabilizing, and we think that we now have a window of opportunity to lock in some yield before the Fed starts to pause or backtrack and bond prices move back up which pushes yields back down.  The stabilizing and subsequent appreciation in bonds will help to slow the depreciation in portfolios especially given our lower level of stock exposure at this time.  As bonds have matured, we have chosen not to reinvest those proceeds and have let that money go to cash for a while now with the thought that we would get more yield and upside if we had some patience and I think that is working out in our favor, so we are starting to drip money back into that asset class now.

On the flip side, we think stocks could still see selling pressure in the next few months and expect to continue to experience big moves both ways as has been the case all year.  A pivot by the Fed at some point, could push stocks up should that happen.  As I have noted in previous commentary, the consumer is very important to our economy as 70% of our GDP is dependent upon the consumer continuing to spend.  As anticipated, inflation is slowing spending by the consumer and that was recently confirmed by some of the major retailers in their earnings announcements.  We have seen housing slowing for the last few months as well and have moved from around 6 months of inventory on the market to 9 months in a short period of time.  Some of these things can help on the inflation front, however, we expect inflation to stay elevated due especially to the price of oil and food as well as continuing challenges with the supply chain.  We have not added to stock exposure in any meaningful way in portfolios but want to be prepared to take advantage of mispricing in good quality stocks.  Things are going on sale and our large cash position puts us in a position to take advantage of that both on the stock and bond side as we move forward.

We understand that these kinds of markets can fray even the most patient investor’s nerves, so please don’t hesitate to call if you want to visit about how we have your portfolio positioned or just want to talk through market conditions.  We drive decisions based on your plan, the time frame in which you will need to use your assets as well as what we know about your tolerance for risk.  A long-term mindset will help you weather storms.

Thank you so much for the trust you place in us to help you navigate this market; we very much appreciate your business, and we consider it a privilege to work with you.  Please don’t hesitate to give us a call if you have any questions or concerns or you just would just like to visit.  The team is always available for you!