Just a Trim – February 24, 2022

| February 24, 2022

Dear Clients and Friends of Optivest,

Since the COVID Recession, the S&P 500 has returned 113.02% (cumulative) from its low point on March 23, 2020 through the end of 2021.  During that same period, Optivest clients enjoyed phenomenal returns on their diversified portfolios. In fact, our portfolios, depending on the model risk tolerance, overall experienced the highest returns our portfolios have seen in decades.  Thanks to conditions such as ultra-low interest rates and easy money, political deadlock on tax law changes, and gradually improving supply chains, we have benefited from a tremendous rally that brought the stock markets back to all-time highs in an incredibly short period.

2022 however is indeed a new year with many new challenges and we recently reported to you we have seen heightened volatility reminiscent of past corrections and bear markets. What is bringing this volatility is a complex combination that we have dived deep into to be sure we have a comprehensive understanding of such as market fundamentals, technical forecasting, and economic and geopolitical markers to make the best decisions for maintaining opportunities to grow while actively avoiding fully participating on the drawdowns. While our diversified portfolios can endure periods of heightened volatility, the good fortune of having highly appreciated growth equity positions as we see heightened risks for investing allows us to moderately trim exposures so we are implementing active management.

In particular, several of our growth-focused equity positions have appreciated far beyond model allocation levels and in light of recent developments listed below, we are taking the unusual step to de-risk your portfolios by selling a small percentage of our growth names to both bring your portfolio closer to model and also to reduce risk.

  • Technical Sell Indication. We follow and rely on many economic data and our long-term timing indicator flashed a sell signal for the first time since 2015. Before that, it only signaled 3 other times including 2002 and 2009.
  • The Conference Board reports that consumer confidence has dropped over two consecutive months in both January and February. Consumer sentiment rises during Bull Markets (often called the “wealth effect”) and peaks in front of sagging retail sales.
  • Russia – Ukraine crisis. This could slow growth worldwide. Russia supplies 40% of Europe’s fuel. Even if a full-blown war does not break out, energy inflation will prove hard to tame by raising rates.
  • The Fed put is gone. The Fed indicates a rate hike is imminent in March. They may simultaneously begin reducing their balance sheet.

Coming off all-time highs in the market, stretched P/Es, and facing higher rates and still high inflation, the likelihood of near-term positive returns of the stock market is slim and creating an outsized risk to reward ratio. Thus we are taking profits on your growth stock funds that have outperformed and outgrown their allocation size in recent years. This should bring our accounts to “under-allocated” to equities.  For this period, we’ll be holding extra cash to help protect your portfolio and wait for a technical green light to fully reenter the equity markets. Meanwhile, your diversified and durable portfolios are built with pre-existing positions that we have previously selected and remain appropriate, including hedges against volatility and rising interest rates through allocations to gold, commodities, floating-rate bonds, preferred equity, and real estate which still see high growth returns and steady cash flows in this challenging environment.

Leslie, Matt, Ryan, and Ashlee

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