The markets gave us a very strong portfolio performance in this first quarter this year. We trust and hope that this is not merely a so-called relief rally but an emerging market recovery foretelling future sustained economic growth. The two interest rate hikes by the Federal Reserve in recent moths were the smallest of the nine hikes this past year. It is becoming apparent that remaining hikes if any, will have little impact on the markets. The the market’s focus has decidedly shifted from stock price valuations driven by interest rates, to stock prices driven by earnings and economic growth. The market’s upward trend has stalled out in recent weeks but has provided sufficient breathing room to accommodate a sharp drop in daily volatility to normal levels.

Inflation has definitely subsided. The 12 month annual inflation rate at 5.0% is the lowest in two years while the one month inflation rate of March alone at 0.3%, when annualized, is 3.6%. Monthly inflation is falling and is much lower than monthly rates of one year ago. Housing prices have softened. The labor market has been cooling but unemployment remains low. Commodity prices have returned to pre-pandemic levels with oil prices modestly elevated and natural gas prices extremely low.

With regard to the recent failure of two large and prominent banks, it is clear that the aggressive FDIC guarantee of all deposits without limit together with new Fed lending facilities was successful in containing contagion… so far. Not counting the five largest banks, bank stock prices remain depressed indicating that though immediate threats remain contained there are many risks remaining. Most banks are showing losses in their bond portfolio assets caused by rising interest rates. These losses cannot be recovered without sustained economic and earnings growth over time, or, until interest rates return to the levels when those assets were purchased. The Fed most certainly will be cautious and take its time before dropping rates and will most certainly not lower them to the historically low levels of the past decade.

While the stock market itself is the most accurate predictor of future economic growth, it seems to be taking its time to discern the future strength and trend of earnings and growth. The emerging consensus in most economic circles is that the economy is clearly cooling in conjunction with falling inflation. The idea of whether or not we technically tip into a recession seems to be less of a concern than whether we can subsequently return to, and sustain, strong economic growth with low inflation similar to that which we experienced for most of the past decade.

As always, we remain cautious and vigilant. Please remember that because these quarterly thumbnail sketches are very brief, do not hesitate to call me if you wish to discuss your account or our outlook in greater detail.

Very Best Regards,

Joseph L. Toronto, CFA

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