>>> Opinion Only from Ronald E. Lang <<<
Hope everyone has been enjoying the summer so far. School has started for many and Labor Day is right around the corner. Whether you are an active or a passive follower of the financial markets, it certainly has been a frustrating year. As you know we (Atlas) are not “traders”, especially with managing client money, no matter if the time frame for clients towards retirement is short or long-term. It’s essentially a fools errand and chasing fools gold to focus on short-term gain. We cannot pick the top or the bottom of the markets as experienced as we are with long-term investing and neither can the “insiders” at the major investment banks that are supposed to be the smartest people in the world, although they can push around the markets. After three years (2019 – 2021) of double digit gains in the markets we had to expect a flat to a negative market at some point.
As we mentioned in our previous “Atlas Note” (see below), the Fed did raise Interest Rates and is expected to do so again in September 2022 by at least .50 bps (basis points). The Fed is trying to slow down the economy to control inflation. EVERY market pundit will give you their view and is quite varied with no consensus on a recession. The anticipated and eventual raising of the Fed Interest Rates over the last 4 months created a more than expected pullback in the market the first 6 ½ months of 2022. We did expect a nice summer rally and the S&P 500 Index getting back to the 4,200 level and it got there quicker than we thought, which is why we are seeing a pause in the market upside for now and will probably continue until the Mid-Term elections in early November. This will create a terrific buying opportunity and adding to quality positions in the late September and October timeframe. In our previous Atlas Note we are looking for a nice 5%-10%+ upside in the markets following the Mid-Term elections until end of 2022 and still expect that to occur. This may carry into 2023, but we need to set expectations properly as it may be a very volatile 2023 ahead of us. Why are we even mentioning 2023 now, to make sure that you are positioned properly and keep your long-term investment thesis is intact before 2023. The best time to make sure you are positioned the right way is before, not after the market moves against you or if specific economic and geo-political events occur.
Recession? The Dirty “R” Word
Nobody wants a recession, but it could be a good thing. You may be reading this with your jaw somewhat ajar, but follow my logic for a moment. Inflation is running amok, people are getting raises but they aren’t better off if the goods and services they are buying are going up at the same rate (or more). With the economy slowing down, even for a short period of time it will help ground inflation a bit, although it may take a few years for it to get back to the 2%-3% level. The Fed, nor the President or Congress can pass any policy or snap their fingers to cut the 8% current inflation in half in a short period of time, no matter what political commercials are falsely stating right now as elections approach. Apply patience!?!? What American citizen can apply patience for what they are paying for gas and goods, not many. Politicians (on both sides) say they can fix it if you elect or re-elect them. Please! Laugh along with me folks. Time is both our enemy and our friend and it will take time for inflation to be controlled. So a recession may help and hopefully it will be short-term. We hope the government doesn’t continue to print and give away money like it has over the last two years, this will make the recession deeper and prolonged if it does. “Tax and Spend” policies and legislation won’t fix the situation either. Are you frustrated reading this paragraph yet? I would be too, but we need to point out areas that are affecting us all. We have always said that we want everyone to be “Safe and Prosperous”, but many things are out of our control. Right now, we project a short-term (3-6 months) recession in 2023 at 75% and a medium-term (6-12 months) recession at 40% and a long-term (12+ months) recession at less than 15%. Sorry if this upsets you, but you aren’t reading this to get healthy recipes (speaking of which, please send me any recipes with spinach in it!).
Positioning for 2023
If we have spoken or been working together you know where I’m going to start off in this section. “It depends on your life stage and situation”.
Long-Term (5+ years)
Consider staying the course! If you are properly positioned now, keep adding to quality positions for the balance of this year and “Don’t Stop” adding to those positions in 2023. If the market does continue to pull back, adding to quality positions in a downtrend will only benefit you years down the road through “compounding”. Compounding is “Your Best Friend”. Meaning, if you add to quality positions in a downtrend (and reinvesting dividends), averaging your cost down while you are adding more shares will compound your returns to the upside. Compounding makes novice investors look brilliant in the long-term.
Short-Term (less than 5 years to retirement)
You should consider “de-risking” your portfolio, if you haven’t already. This isn’t to say you should or could have some Growth or Growth/Value assets in your portfolio, but if there is a recession and depending on how close you are to retirement, moving towards income-oriented assets is a good strategy for portfolio stability and consider and using a derivative strategy with Call Writing options to hedge to the downside and generate income could be a sound path to follow.
Hybrid Portfolio (Total Accounts Balance is more than enough to generate the income you need to live on, so a “%” of the portfolio is a Growth and or a Growth/Value allocation)
In this situation you would consider combining strategies. You have a percentage of the portfolio that is Fixed-Income to stabilize the risk (and generate the income you need on a regular basis), the balance is meant to grow that portion(%) of the allocation over time, with no horizon time line in mind. The goal is not to be speculative in nature, but look for companies or funds that are in sectors or industries that are still growing or in “emerging markets” that expect to grow over the next 5 – 10 years.
Remember, there is no “cookie cutter” allocations or portfolio’s. We (Atlas) are not Robo money managers and unless there is a special situation, we do not rebalance portfolio’s on a regular basis. If investments are working out and trending to the upside, why would we reduce that position instead of letting it run to the upside? The hybrid approach is for larger portfolio’s, especially if you believe your income needs will be greater 5+ years out while you are generating income now. As that portion(%) of your portfolio growths, you can harvest some of that money in the future and generate additional income you require as your life stage and needs change.
In summary, investing can be emotional, it should be as it is your money and a large part of your net worth. It’s impossible not to think about it, but you shouldn’t be losing sleep thinking about it and market gyrations. If you are a client and/or we have just had deep conversations over time about this you know my mantra when it comes to the emotions of investing. Unfortunately, when it comes to putting a steady diet of life events and situations like your job, the economy, sprinkle in political rhetoric and geo-political concerns into your crock pot, then it becomes unhealthy while you continue to digest all that information. You have heard of the expression, “slow and steady wins the race”, we agree and apply a long-term strategy to that mentality.
Enjoy the rest of the summer and get ready for our next communication to setup 4th quarter calls/meetings.
With Best Wishes,
Ronald E. Lang, Principal & Chief Investment Officer
Atlas Wealth Management, LLC
www.AtlasBuildsWealth.com – 888.403.9400