2nd Quarter 2022

   With the Fourth of July now behind us, we’ve made it into the heart of summer, enduring a second quarter that was one for the record books. The S&P closed out June with a YTD loss of over 20%, which the Portland Press Herald (republished from an Associated Press article on July 2, 2022), said was the worst start since 1970.[1] The Feds raised rates by 50 basis points in May, and 75 more in June, “the largest single increase since the 1990s,” according to Dorsey Wright’s end of quarter newsletter.[2]

   The Associated Press article noted bonds were on pace for one of their worst performances in history.[3] By the second quarter the increasing growth in the inflation rate pressed the Fed into aggressive action. By now, no one is talking about Transitory inflation anymore. Younger adults are trying to wrap their heads around what the end of low, to no interest debt will mean for their budgets and financial wellbeing. Some of us are having Deja Vu with talk of stagflation, and memories of those WIN buttons (Whip Inflation Now), which were meant to take the sting out of spending your whole paycheck for a tank of gas and once a month splurge on steak. Inflation has already taken a toll on investment markets.

   Jerome Powell, Federal Reserve Chair, speaking June 29th at a European Central Bank Forum, warned, “there is no guarantee” that the Fed will be able to get inflation under control without bringing on a recession. While it is still the goal of the Fed to engineer a “soft landing” (a difficult task to begin with), Powell acknowledged that taming inflation without causing a recession and a sharp drop in employment will be difficult, more so with the Russian invasion of Ukraine.[4]

   An article in Advisor Perspectives by Michael Lebowitz, “The Trolley Car Problem - The Fed’s Predicament,” July 6, 2022, addresses their dilemma:

A Trolley Car is out of control and must be routed to one of 2 tracks, where the lives of people tied to the rails of each track will be in jeopardy. Those in charge must choose which of 2 paths to take. For the Feds, one track leads to a recession and an ongoing bear market; the other leads to higher inflation.

Lebowitz says “the problem making this task very difficult is that the Fed grossly underestimated the persistent nature of inflation . . . through 2021, the Fed kept interest rates at zero and bought $120,000,000,000 of bonds per month. . . they continued to believe as we entered the new year that the inflation we were seeing was mostly transitory and inked to Covid related supply chain issues.”[5]

   Dorsey Wright’s end of quarter newsletter for DWA, June 30, 2022, points out that the most recent figures on GDP, for the quarter ending March 31, 2022, showed negative growth, down 1.6%. The Atlantic Fed’s GDPNOW forecast indicates GDP may be negative again for the second quarter. They discuss that the current level of government debt is “2X as much as a % of GDP as in 2008.”[6] We have not forgotten what followed then, and we won’t know for sure if we are in a recession until it has already begun. More analysts are suggesting we may be there, and many others that if we are not there yet, the risk is rising.

   With this backdrop, Americans are feeling less optimistic about the economy and more dissatisfied with current leadership. A recent poll reported by Josh Boak and Emily Swanson for the Associated Press on June 29, found “an overwhelming and growing majority of Americans, including 8-in-10 democrats, think we are moving in the wrong direction; and 79% describe the economy as poor (NORC Center for Public Affairs Research). President Biden’s approval level fell to the lowest point of his presidency last month, and currently remains at that level.[7]

   It has been a difficult 6 months for investors and for those who manage others’ portfolios. While there are some signs that Fed action is already beginning to reign in inflation, the burden of much higher costs for gas, heating fuel, and food will continue to impact consumer’s behavior, as will the rapidly increasing cost of borrowing. So, stocks, while having already seen some seemingly unreasonable bouts of selling, tread rocky ground as they attempt to rally. We continue to play defense, while occasionally nibbling at a stock we feel holds long term growth potential. This is one of those times when tending your garden can be tedious and discouraging, with too much heat, or too much rain, or deer decimating your vegetables. It can make one feel they are losing ground. But it is work that needs to be done to keep the gardens healthy and flourishing over the long term. We believe the difficult and uncomfortable work required now will reap rewards as we move into a more positive economic cycle.

   We hope that you are enjoying the fine summer weather. As we tend to the gardens and deal with unexpected shifts, both positive and negative, we appreciate your trust. Please don’t hesitate to reach out if you have questions or concerns.

Debbie, Preston, and Katie