This past quarter has been extremely profitable, with accounts reaching all-time highs on the strength of the tech and semiconductor sectors. However, since the end of June, the market has experienced unusually high volatility, especially in these high growth tech sectors due to war, trade and energy uncertainties erasing some of those extraordinary gains. The old adage, “The first casualty of war is the truth,” aptly describes the challenge facing investors and analysts as conflicting information contributes to much of the volatility. The Administration’s regular assessments of the situation often proved overly optimistic and, in many cases, did not materialize as anticipated, adding to market corrections and uncertainty.
Despite this volatility, the underlying economic fundamentals remain resilient and stable. Productivity, economic growth, and consumer spending, despite the challenges of elevated inflation and high costs, have proven consistent and stable. The labor market remains one of the most stable in years with continued full employment, albeit with somewhat elevated unemployment. The recently confirmed Chair of the Federal Reserve, Kevin Warsh, has signaled a continuation of the Fed’s data driven approach but different modified application which does not entail disruptive policy changes. This outlook is reinforced by this months inflation reports which showed inflation while still above target is dropping which alleviates any pressure to begin a tightening bias. As a result, interest rates and the bond market will likely remain stable for now.
The energy markets also have achieved a measure of stability in the $70 – $80 per barrel range, modestly above pre-war levels demonstrating the energy markets ability to adapt quickly to supply disruptions. We also anticipate that the major armed conflicts will not quickly resolve, but will stabilize in some form, as further escalation or prolonged conflict is unlikely to further advance anyone’s economic or strategic interests. One consequence, however, will likely be an acceleration of military spending for replacement of arms and weaponry, which will obviously incur higher deficits. Historically, rising deficit spending generally boosts economic growth and productivity, but in this case, it will likely come at the expense of infrastructure, education, healthcare or other societal priorities.
Overall, our outlook remains positive, and we believe the markets long-term growth trend remains intact. At the same time, we continue to monitor risks closely and remain cautious and vigilant in our outlook. Please remember that these quarterly thumbnail sketches are intentionally quite brief; so do not hesitate to call if you would like to discuss your account or our outlook in greater detail.
Very Best Regards,
Joseph L. Toronto, CFA
Affiliated Investment Advisors 