Back in March, I posited: “With a bump up in inflation, early signs of economic weakness – and with the markets at all-time highs – we have a recipe for volatility.” As it turns out, April and May gave us just that. But the good news is, the S&P 500’s 5% decline in early April has been recovered, and the fundamental elements for further gains are still intact. I like the Hennessy Cornerstone Mid Cap 30 Fund (HFMDX) here, says Brian Kelly, editor of Money Letter.

Volatility is not an easy thing to live through, but investors must think of it as part of the price they have to pay for the benefit of long-term equity returns. We all want the stock markets to advance, but reality reminds us that the markets can’t go up all the time.

Thus, when uncertainty grows it’s only natural for investors to manage risk by being quicker to reduce their equity exposure. We expect the volatility to continue because there are unanswered questions.

A pie chart with text  Description automatically generatedWhen is the Fed going to cut interest rates? Digging deeper, will the inflation outlook improve enough for the central bank to feel “confident” in their decision and avoid a policy reversal? In the meantime, will Treasury yields settle down toward the levels we saw earlier this year?

As long as these questions remain, we can expect the equity and bond markets to stay unsettled. But the intermediate-term effect (say 3-6 months) on investors will be palatable as long as the next move by the Fed is a cut and not a hike.

As for HFMDX, the fund seeks long-term growth of capital. It normally invests at least 80% of its net assets in mid-cap, growth-oriented common stocks by utilizing a quantitative formula known as the Cornerstone Mid Cap 30 Formula. It purchases 30 stocks weighted equally by dollar amount, with 3.33% of the portfolio's assets invested in each. Using the Mid Cap 30 Formula, the universe of stocks is re-screened and the portfolio is rebalanced annually, generally in the fall.

Recommended Action: Buy HFMDX.

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