Portfolio Update
We recently reduced the overall risk in your portfolio, taking some gains off the table and placing them on the sidelines to have dry powder ready for new opportunities. In this brief video, we break down the reasons for this move. We kept the video short and provided some additional commentary below the video.
Summary
The market has continued to show strength, with the three major US indices (S&P 500, Dow, NASDAQ) reaching all-time highs last week. While these milestones are noteworthy, specific economic indicators such as inflation and employment trends warrant a cautious outlook for the near-term direction of the US markets.
Although inflation has decreased significantly from its June 2022 peak of 9% to the current level of 3.4%, it remains above the Fed's target rate of 2%. This “stickiness” suggests a likely scenario of "higher for longer" interest rates. Prolonged higher rates could exert downward pressure on company earnings, margins, growth, and consumer demand. You might wonder why the Fed doesn't begin cutting rates now. The simple answer is that premature rate cuts could reignite inflation, bringing us back to square one.
On the employment front, the current unemployment rate stands at 3.9%, below the 50-year historical average of 6.2%. While this figure reflects a strong job market, the recent uptick in unemployment is a reminder that employment trends can shift quickly. Historically, unemployment tends to decrease gradually and increase rapidly. Should the Fed delay rate cuts due to persistent inflation, the risk of a significant economic slowdown—and a sharp rise in unemployment—heightens.
Considering these factors, we view the "higher for longer" scenario as the most likely outcome. As such, we have taken profits near the all-time highs and reallocated some assets to the sidelines. This strategy serves as a protective measure to insulate against a possible market pullback and ensures we have available capital to deploy when opportunities arise. Rest assured, this is a tactical move within our broader long-term investment strategy.
We remain committed to navigating these market conditions with a focus on your long-term financial goals. We remain nimble and ready to react in either direction as we see more data and as the market continues to move.