Despite continuing evidence that the US economy is gradually slowing and we are most definitely entering into the later phase of this economic cycle, the overall financial markets have taken on a friendlier tone than earlier this year.  As of this writing, the stock market is slightly up for the year - as is the general bond market.  Portfolios, in general, have posted very moderate gains so far, with the general feeling that the "bad news" of a slowing economy has mostly been factored into the market, and assets in general are priced fairly.

In general, it seems that Wall Street and investors in general expect news going forward to moderately improve, which foreshadows modest but generally good news for investors.

The later phase of the economic cycle is typically marked by stock market volatility (which we have seen), rising interest rates (which, with a very timid Fed, will likely happen slowly), mild inflation, a stable and low unemployment rate, and a dominance of large, dividend paying stocks over the rest of the market.

In anticipation of this phase, we have already positioned portfolios to take advantage of this by: 

• Increasing our weighting of large, dividend paying stocks over smaller ones;

• Adding real estate and utilities into the portfolio for high dividend yield;

• Reducing "growth" stocks such as technology and biotech;

• Significantly increasing the credit quality of our bond positions;

• Eliminating "junk" bonds and international holdings, and

• Reducing the interest-rate sensitivity of the bonds in portfolios.

Historically, the "late phase" of the economic cycle lasts between 18 months and three years from the first interest rate increase.  With a very sensitive Fed, it is quite possible that this phase will last longer than usual, which would also be good news in general for investors, as it would delay the onset of recession and allow portfolios to be maintained as they are for longer.  Even though this period can be a volatile one, equity (stock) markets tend to do better than bond markets during this time.  Additionally, even if the stock market effectively goes nowhere, positioning portfolios in such a way as to capture dividends from the larger, dividend paying stocks should allow us to capture returns and grow accounts.

However, as we know, both economic news, as well as stock markets, can surprise even the most watchful investors.  For this reason, we are closely monitoring all of our Recession prediction tools in order be ready to move out of the stock markets if it appears the economy is finally descending into recession.  Eventually it will - but it could still be several years away.  

Currently our models do not signal recession.  Recession Alert puts the odds of a recession occurring within the next 3-4 months at only about 8% - a slight reduction of the odds, even with a poor jobs report being posted last week as well as unusual turmoil being caused by a very contentious Presidential election process.

As always, we will continue to monitor the data closely, and keep you informed as events unfold.

Jon Castle is Managing Partner and Chief Investment Officer of PARAGON Wealth Strategies, LLC.   His complete bio can be viewed here:  https://www.wealthguards.com/jonathan-castle-msfs-cfp

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