Cooking over a campfire is challenging. If you’ve ever done it, you know what I mean. The fire can be difficult to start, the flame heat varies, the cooking surface is often uneven and the whole cooking experience can get pretty smoky. At the same time, there is something uniquely satisfying about overcoming all of these variables that makes a campfire meal utterly fantastic.
As we get back to work after the 4th of July holiday, it occurs to me that restarting the economy after COVID is not unlike cooking over a campfire: There are pockets of heat, some uneven areas that need extra attention and some unexpected challenges with which we must deal.
Back to our campfire analogy: The primary key to getting a good campfire meal going is to get all the wood to catch fire at once, roar up and then settle down into a nice, even bed of hot coals. That’s easier said than done. Some of the wood can be wet, the ground underneath is usually uneven and the wind around you may swirl and create havoc. This causes some areas of the fire to burn too hot and others to struggle.
During the COVID economy, companies with technology and remote service models flared up fast like dried kindling and burned bright. On the other hand, companies that we’re economically sensitive, or dependent on industrial production or energy demand, smoldered and struggled like damp wood. This damp part of the “campfire economy” risked putting the entire fire out.
To protect the overall economy, the government applied generous amounts of lighter fluid in the form of stimulus checks, unemployment benefits and Paycheck Protection Program (PPP) loans. The Federal Reserve also cut interest rates so they would act like a huge bellow, blowing oxygen onto the economic fire. These strategies worked and our country’s campfire again roared up.
Now, post burn, we need to decide more carefully how to arrange our financial cooking pots. The overall economy is in good shape and starting to burn more evenly. At RegentAtlantic, we don’t see a risk that any major parts of the fire will go completely out. We believe that the technology companies that burned brightest early on in the recovery may be running a bit low on fuel and may burn with less intensity. However, economically sensitive companies that struggled early on now have more fuel to burn and should be in better shape to burn hotter and longer.
In response, RegentAtlantic has been shifting our portfolios toward more cyclical companies, and toward small stocks in both the United States and abroad and in real estate. We believe these areas have stronger prospects in the economic recovery.
In foreign markets, we have reduced our exposure to emerging market stocks. Emerging markets still face COVID-related risks, as they have larger populations with less vaccine availability than developed economies. At the same time, developed foreign markets have more cyclical stocks than the U.S. market. We are exploring more opportunities in these markets.
We are also being defensive in the bond portion of our portfolios. After all, all the fuel and oxygen being applied to the “fire” could cause the economy to burn a bit too hot and produce inflation. As you know, inflation erodes the purchasing power of fixed- income investors and may increase interest rates. That, in turn, can causes prices of bonds to decline.
By reducing our maturities on bonds and using fewer interest- rate- sensitive strategies, we are working to safeguard our client portfolios from these risks. We are doing so by favoring opportunistic bond managers who use different strategies other than just loading up on traditional corporate bonds. Lower interest rates have also enticed investors to pay up for corporate bonds and chase yield opportunities. We believe this approach has reduced corporate bonds’ relative attractiveness, so we are currently deemphasizing them in our portfolios.
Looking again at the campfire cooking analogy is useful here. As you know, you cannot stack all your cooking pots on top of each other when you make a full meal. You need to spread them out so they all get their fair share of the heat. You also must pay attention to the changing coals and make continual adjustments so every pot gets some good cooking time. In our financial portfolios, we must stay equally diversified, monitoring the markets, rebalancing allocations and making continual adjustments. We believe that following this process will yield a satisfying portfolio and a perfectly “cooked” financial “plate” for our clients.
We hope you’re enjoying your summer as much as a kid eating the perfect s’more on a camping adventure. Please feel free to contact your Wealth Advisor or me with any questions or concerns about your RegentAtlantic holdings or future financial plans.
Important disclosure information
Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.
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