2nd Qtr 2023 Newsletter
2023 Second Quarter Newsletter
Unsettled seems like an understatement for our weather, and the volatility in the markets over the last quarter. By now, numerous weather records have been broken and we know much more than we ever wanted to about Omega Block Patterns. They prevent weather systems from moving around the country normally and have made it impossible for much of the Northeast to string together more than two dry, warm days in a row.
Meantime the Fed has held stubbornly to a pattern of its own, dampening any enthusiasm which might spring up in the investment markets, reminding us even in the face of a pause this June in its aggressive rate increases, that it is not done with us yet!
Chairman Powell and his committee made clear they are steadfast in pursuing a 2% target inflation rate, the fact that many economists see this as a fantasy, notwithstanding. To that end, they indicate more rate hikes are coming, perhaps two more this year. There was sufficient evidence that the painful rate hikes since May of 2022 have dramatically lowered inflation, causing the Fed to take a pause. John Mauldin of Mauldin Economics wrote in a June 18, 2023, piece for Advisory Perspectives, "A Skip Not A Stop," that "with the annual CPI at almost 9% last May, the impact on all of us changed behaviors in many ways. As businesses, consumers, and investors responded to the painful medicine, our collective decisions seem to have had the desired effect, with May 2023 showing an annual CPI of 4.1% and seeming to be pointing lower." But he warns there is likely more medicine to swallow.1
As economists and analysts digested June "skipping" itself, and Powell's follow up comments, some felt the Fed would hold off from further hikes through 2023. This scenario holds that we may already be in a technical recession or are likely to be in one by year-end. The Fed will then use the only tool it may have to prevent a deep recession, which would be by cutting interest rates. Mauldin believes having staked his credibility on an aggressive campaign to beat down inflation that Powell will not risk a rebound, or an over enthusiastic stock market, and will resume tightening before year-end.2
As we have seen, the Fed walks a narrow line between under-doing and overdoing tightening. Mauldin writes a pause at the current rate is tightening the money supply. As each day passes and one's adjustable-rate mortgage resets significantly, a business's commercial line of credit comes up for refinance at a substantially higher rate, and another's commercial real estate debt due is double that of the maturing loan, hard decisions will need to be made. These effects will continue to ripple through the economy for some time to come.3
The Wall Street Journal ran an article on the subject recently, saying 11the credit crunch is here, and will take not quarters but years to play out if the cost of capital remains high ..things in the private economy work well at 3-4%, not so much at 10%." The rate many small and medium sized companies are now paying, "we are on a whole new economic playing field."4
If the Fed manages to pull off a "Goldilocks" like scenario in its battle with inflation: tightening not too little, and not too much, but just the right amount to kill inflation and avoid a recession (or at least a deep one), investors anticipating June's action is an actual Stop, may well be happy in the New Year. However, it may already be too late to avoid a recession. We all may need to exercise more patience in waiting for the right opportunity to deploy cash back into the markets. In any case, we feel caution is called for. While Goldilocks found the bowl of porridge at just the right temperature, and the chair and bed that were just the right fit, she still awoke to find three angry bears surrounding her.
As we write this newsletter, our corner of the Northeast has managed to string together a few sunny, dry days. The extended forecast still shows unsettled weather, but there appear to be some summer-like days ahead. We hope you have a chance to enjoy them, and perhaps relax with a good book, letting the weather and the Fed play this out. At some point, the Omega Block will break, and the Fed will declare Inflation beaten. We continue to watch and to practice patience. We look forward to better times in the market and are prepared to take advantage of them. As always, we thank you for your trust and support.
Enjoy the rest of the summer!
Preston, Debbie, and Katie
The Galarneau Group
1-3 Maudlin, John, Advisory Perspectives, "A Skip Not A Stop," June 18, 2023.
4 Wallstreet Journal, July 4, 2023.