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Market & Investment Allocation Update

June 10, 2022

Current Allocation

Greetings! First and most important: accounts custodied at TD Ameritrade are 100% in cash. Stock and bond markets continue to suffer losses and there are few places to hide. The moves that we’ve made so far this year have served to greatly reduce the pain many are feeling when they look at their investment account statements.

On June 2, 2022, we did purchase utilities in the growth side of accounts custodied at TD Ameritrade but, as I will explain below, we sold them on June 7, 2022.

This was my thinking behind the purchase: utilities tend to be a defensive play and often attract flows when the market/economy are rolling over, taking from other industries/sectors that are going to get hit hardest by a recession. The idea is that consumers/businesses might not spend any more on discretionary things during a recession, but they’re probably going to continue to pay their utility bills. So investors might end up being attracted to those positive cash flows from the utilities sector in the face of diminishing cash flows in other areas.

However, when the S&P 500 Index is in a negative trend (it is), it’s challenging buying risk assets, even defensive areas like utilities; it’s like the crab who’s trying to crawl out of the bucket but all the other crabs in the bucket just pull it back down. We bought utilities needing to see it positively diverge from the market if the S&P 500 Index was heading down. If it didn’t hold steady when the S&P 500 Index started heading down, it was going to be cut without hesitation.

In the end, utilities were not acting the way they needed to act during broad market pullbacks so we sold all of it on June 7, 2022. It’s not my intention to be in and out of something so quickly but because the broad market is in a negative trend, anything we buy right now has a next to zero tolerance policy.

My goal is not to remain in cash as we don’t make any forward progress being in cash. Some might even make the case that once you factor in inflation, cash looks even worse. However, when you factor inflation into negative-returning stocks or bonds, those returns are even worse by the same magnitude.

Everyday I’m looking for areas in the market we could allocate capital and if I see an opportunity for you that makes sense, we will take action. Until then, we’re going to focus on continuing to win by not losing while always looking for opportunities to make forward progress.

White Hot Inflation

As I’ve written extensively about before, inflation is out of control and I believe the Fed and other central banks around the world have no choice now but to raise interest rates and reduce their balance sheets. (Reducing their balance sheets is akin to destroying money instead of printing it.) The stunningly high inflation number that was reported this morning continues to confirm that this is the likely path in the intermediate term.

There’s a quote from Martin Zweig that goes like this:

“Stocks are super-attractive when the Fed is loosening and interest rates are falling. In sum: Don’t fight the Fed!”

Simply put, the opposite of that is going on right now. So don’t fight the Fed.

Bear Market Mentality

Patience is going to be paramount for the time being. We don’t want to allocate capital just to try to do something. We are patiently waiting for opportunities that make sense for you.

One of the most important things to remember in a bear market is that there will be days, often several in a row, where the market rockets higher and it feels as if we’re missing out. That could be the start of a change in trend but often it is just part of a downtrending market. Again, patience is paramount.

With the rally in the stock market that just happened from May 19 to June 2, that will be what I would posit is the third bear market rally this year. That is three times that many people probably thought the worst was over only to have the rug pulled out from under them.
Fortunately, that has not happened to us this year.

We will make any additional changes as necessary based on market conditions and we welcome any questions you have.

David W. Shepherd Jr. CFP®

6300 E El Dorado Plaza, Suite A200
Tucson, AZ 85715
Phone: 520-325-1600
Fax: 520-325-9097

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Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Shepherd Wealth &
Retirement LLC ("SWR"), or any non-investment related content, made reference to directly or indirectly in this update will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. To the extent you have questions regarding the information discussed above, your investment adviser representative remains available to assist you.

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