Market Commentary and Portfolio Changes

The third quarter was marked by continued market volatility and economic uncertainty. The brief rally in August was stymied by poor inflation data that led to expectations of large interest rate increases. Those expectations were proven correct as the Federal Reserve raised rates in September and signaled its intent to continue to aggressively raise rates to combat inflation.

With the specter of a recession seemingly around the corner, the question on everyone’s mind right now is: where can we position our assets to withstand any more turbulence?

One defining feature of the 2022 markets is how highly correlated things are. In years where stocks are down, we’re used to seeing bonds as a ballast in portfolios. However, this year bonds and stocks are both down. With expectations of continued volatility on the horizon, we sought to add a component to the portfolio that would act as a buffer. To that end we added a fund which attempts to limit drawdowns during periods of stress.

And while bonds have not fared well so far in 2022, there is reason to believe the tides may be turning. As interest rates climb, bonds are issued with higher yields which helps boost their return. To take advantage of this change in the bond market, we added a short-term bond fund that invests in 1-3yr. Treasury bonds. We also added an investment grade bond fund and a high yield bond fund. These funds complement each other by taking on different levels of risk to return.

Finally, as we orient the portfolios towards the future we know one thing for certain: companies that have positive cash flows will fare better than companies that don’t. With this in mind, we added a fund that strategically screens companies based on free cash flow and only includes the top 100 companies in the Russell 1000 based on that metric in its portfolio. We will continue to monitor the markets and the economy, and keep you apprised of any changes we make.

If you have any questions, please reach out to your advisor or call our office at 952-852-1293.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.