My family spent the holiday season in the Florida Keys and as we approached the end of our vacation the omicron variant began its sweep across the country. It found our family just as we were preparing to travel home with a couple of us testing positive the morning of our flights.
We extended our stay and with some persistence were lucky enough to rent a pickup truck and throw all of the luggage in the back, yell ROAD TRIP and head North on I-95. 26 hours later, we hooted and hollered with exhausted joy as we crossed the Portsmouth Bridge into Maine!
How we able to get home to Maine so quickly?
- No heavy traffic or accidents
- No bad weather
- No blue lights in the back window
- Waze and Google Maps constantly steering us to the most efficient way home
…and infrequent and short rest stops done reluctantly by competitive drivers!!
In many ways, the investment road has been a similar one since a few months after the pandemic began. The US government has plugged the economic hole created by covid with massive amounts of stimulus spending and the Federal Reserve has held interest rates at near zero. The result has been an investment road cleared temporarily of many of the bumps, sharp curves and bad weather…AND that has allowed us to set cruise control a bit higher than normal with a consistent and substantial overweight to stocks… arriving at total return destinations much quicker than projected for the long term.
As we look at the road ahead now, conditions have changed considerably recently and will continue to do so. Fears of higher and sustained inflation are prompting the Fed to signal that higher interest rates are on the horizon sooner than expected—lowering the speed limit to help prevent the growth engine from running out of gas or breaking down. Company earnings are still robust but slowing and by most measures, the majority of stocks are now pricey relative to historical averages.
So how do we adjust our driving strategy for the new road ahead? First, we turn the cruise control off, slow down a bit and pay close attention to the warning signs on the highway:
- Higher inflation
- Higher interest rates
- Higher taxes
- Lower government stimulus
With warning signs like these, our experience on the investment road tells us we should be fine tuning our engine for the more dangerous road trip ahead:
Stay overweight but reduce slightly relative to bonds
Continue to tilt towards value with a particular focus on companies with dominant global brands, wide economic moats (pricing power) and growing dividends
Maintain overweight to mid-caps
Maintain allocation to REITs
Maintain but slightly reduce underweight to developed foreign
Maintain underweight to emerging markets
Minimal allocation to long term maturities
Maintain overweight to bonds which have been historically resistant to rising interest rates (high yield corporate and municipals and convertibles)
Protect the cushion/safety net with high quality at the core
Every family has its legends which become exaggerated with each telling of them…turning them into family folklore. Our story of driving from Key West to Maine in 26 hours will no doubt become one of them. We could make the same trip 50 more times and would likely not come close to beating that record. In the same way, investment returns of the last couple of years are not likely to be matched over the next few. However, we are confident that our driving experience in all conditions will allow us to continue to successfully cross the bridge to your family’s or institution’s goals.
Happy New Year to you and your families and please don’t hesitate to reach out via phone or email if we may be of service.
Brian Bernatchez, CFP®
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All investing involves risk including loss of principal. No strategy assures success or protects against loss.