This report contains the 2022 Q3 quarterly allocations for your retirement plan’s tactical models. As of this quarterly review, the U.S. equity trend indicator was negative, the international trend indicator was negative, and the Balance of Strength Signal was negative. The Bond Bull-Bear Indicator remains negative.
In late January, the stock indicators we use in these models turned negative and the models moved to more conservative allocations just above each model’s minimum High Risk Category Exposure. For this quarter, the models will reduce their High Risk Category exposure all the way to their minimum allocations. Money not invested in High Risk Category investments will be allocated to the money market fund. With short-term rates rising, money markets are starting to provide a decent yield especially when compared to the uncertainty in the bond markets. We will monitor the market action and will consider intra-quarter changes should the indicators change. Changes to the model allocations will be made in July.
Most stock indexes entered a bear market this past quarter with losses of 20% or more. The top performing stock sectors of the last couple of years have been hit the hardest year-to-date. For example, the technology heavy index, the NASDAQ 100 had lost over 30% YTD this past quarter. What has been most surprising this year has been the negative returns of bonds. It has been reported that the first quarter of 2022 was the worst quarter for the U.S. aggregate bond index since 1788. It has also been one of the worst starts of the year for a typical stock and bond portfolio. It has been since the 1970’s that we have seen comparable periods of stocks and bonds both dropping this precipitously.
Inflation continues to be one of the pressing concerns for the global economy. In an effort to fight inflation, the Federal Reserve has continued to raise short-term rates and they are embarking on a plan to reduce their balance sheet, which typically has a contractionary effect on financial markets and the economy. With some of the economic data coming in, it appears as though their plan of reducing demand by slowing down the economy may be working. This is a delicate situation. Their goal is to weaken demand enough to reduce the growth of inflation and slowly bring it down. The problem is that once the economy begins to slow, it can be hard to control the rate of decline. They will try to avoid a severe recession, a hard landing, and will shoot for a soft landing. Their task is further compounded by the issue that some areas of inflation are caused by supply disruption and not increased demand. People need to eat, farmers need diesel fuel to run their farms, food needs to be transported (usually by truck – diesel fuel), and people need to heat their homes. These are all core needs that need to be met. If an increasing amount of money goes toward paying for these items, then there will be much less available for discretionary spending. This may lower inflation in some areas of the economy, but monetary policy might not have big impact on energy and food inflation. Changes in governmental policies might have more of an impact on energy and food inflation. The other major issue facing the global economy is Russia’s invasion of Ukraine and the west’s financial response to it. The disruptions of war and the U.S. and EU sanctions have had profound effects on global energy and food prices. The longer the war lasts and the sanctions remain in place, the greater the uncertainty. This could become more of an issue for the European Union as we move into fall and winter. It should be an interesting summer quarter.
If you are uncomfortable with your selected model maintaining its currently low High Risk Category exposure, we recommend that you look at other plan investment options or a more aggressive tactical model. You can also contact your investment advisor representative, Stephen Hetrick at Hetrick@retirementc.com or 717-545-1447 to discuss your concerns and alternative options. Feel free to jump right to the model pages or first read our model and market commentary. As always, if you have questions regarding these models, your deferred compensation account, or retirement planning; do not hesitate to contact us.