Last year, we discussed that the key variable to dictate the sustainability of the market rally would be inflation. “If inflation is moderate and transient, the Fed and fiscal policymakers will be able to keep their feet on the gas; if inflation rises too rapidly and is persistent, there may be a difficult choice between the two mandates [1-Maximum employment, 2- Price Stability]” (2021 Q1 Market Commentary).
In the beginning of 2022, it appears that the later outcome has come to fruition, as inflation now nears an 8% annual pace. There is a growing sense that the unprecedented fiscal and monetary stimulus applied to the economy in the past two years – which initially succeeded in keeping the economy out of recession – was too large and lasted too long. Additionally, recent food and energy supply shocks, as well as shortages in the supply chain and labor market, have increased the likelihood that inflation is persistently higher than the central bank’s 2% target.
To deal with higher inflation, Federal Reserve officials are beginning to raise interest rates and tighten the money supply. If they do so too slow, inflation will be unresolved. If they do so too fast, the economy will contract, and growth will slow.
In light of the above environment, we will be rebalancing the IEM Portfolios. On the fixed income side, we are increasing the allocation to Treasury Inflation-Protected Bonds (TIPS) and Short-Term Treasuries. On the equity side, we are increasing the allocation to Value stocks and reducing the allocation of Growth stocks.
As always, these changes within the portfolios are at the margins. We fundamentally believe that well-diversified portfolios, time in the market (instead of timing the market), and good financial planning are most important to long-term success in investing. If you would like to discuss these changes to the portfolios or your current financial picture, do not hesitate to call, email, or use our online portal.
I wish you all a wonderful Spring 2022!
Best,
Daniel Schoenecker, CFA, MBA
Chief Financial Officer
Disclosure: Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.
