1st Quarter Update Summary – Still Waiting for Landing

Last quarter, our technology stocks performed very well due in large part to our emphasis on AI. Nvidia, the dominant supplier of GPU chips used in AI was the driver of those gains and eventually became overvalued and becoming destined to return to reality as is now happening. This recent retreat was instigated in part by two factors. The first is, because of ongoing economic strength and stubborn inflation the Fed began overtly tamping down expectations for any interest rate reductions this year. The effect on the markets was instantaneous. The second is that strong demand in the AI sector that had caused backlogs in order for chips and equipment, has abated along with unrealistic expectations for growth and earnings. Even though the backlogs have diminished, and prices are retreating, the sector remains very strong. AI has the capability to greatly enhance efficiencies in manufacturing, productivity, earnings, and to also increase jobs in nearly every facet of the economy.

2023 Year End Summary – Goldilocks Economy, Not too Hot, Not too Cold

In recent days, the stock markets have surpassed the previous all-time highs achieved in December of 2021. As the Fed increased short-term interest rates during 2022, the stock market likewise went straight south. It took all of 2023 to regain that lost ground. Now in 2024, the economy appears to be in a Goldilocks condition, not too hot and not too cold. Inflation has subsided to levels that will make the Fed’s target of 2% achievable within coming months. The labor market is as strong as can be with wages rising and unemployment less than 4% for two years running. The economy has not been this productive for 50 years. Help wanted signs are still everywhere. It is becoming apparent that even without new fiscal or monetary stimulus from either Congress or the Fed, as is likely, the previous trillion dollar covid stimulus money is still circulating and accommodating consumer demand that is more than enough to keep powering the economy forward for some time to come.

3rd Quarter Update Summary – Yield Curve Trauma

Some aspects of the economy are quite strong and steady, however, there are some new developments with an as yet unknown impact. What appears to be resolved is that inflation continues to retreat approaching the Feds’ goals albeit more slowly than desired. Employment and consumer spending remain steady, and together with expanding manufacturing is sustaining the economy on its current strong path. Residential and commercial construction remains steady despite a very slow resale market.

What is new this quarter is that long-term interest rates (bond yields) have begun rising sharply. The Fed sets short-term interest rates but the bond market determines long-term rates. These rising long-term rates have been putting pressure on the stock market as well raising mortgage rates to 8%. This will certainly affect the housing resale market and eventually new construction. Another effect is that without any new intervention from the Fed, the closely watched yield curve is no longer inverted but has reverted to a flat profile. The yield curve has been a historically accurate predictor of economic growth. Depending on the future path of long-term rates, the Fed may choose to reduce short-term rates much sooner than they had planned and let higher long-term rates do the hard work on inflation.

2nd Quarter Update Summary – Will it be Soft Landing or No Landing?

The markets and the economy seem to have completely shaken off the trauma of the dramatic increase in interest rates of last year. The market, and our accounts, since last October have shown excellent performance by recovering all of the 2022 losses while reaching new highs. Each week and each month, there is very little new and earthshaking news that would alter a strong and positive economic trajectory. The economy continues to perform moderately well. There is very little that would exacerbate inflation or cause a slowdown. Labor and employment remains moderately strong as ongoing job creation continues while historically low unemployment is barely rising. Housing remains moderately strong as housing starts, building permits and existing home sales have all been very steady even with elevated mortgage interest rates. Consumer liquidity and consumer demand continue to support ongoing durable goods and consumer goods.

1st Quarter Update Summary – Markets Now Driven by Interest rates or Earnings?

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.

Year End Summary 2022 – First Ever Soft Landing?

This past year has been an extremely difficult year for stocks and financial instruments in general. The Federal Reserve has been aggressively raising short-term interest rates to try to slow economic growth and contain inflation. Although the 12 month annual inflation rate remains relatively high, the last six months of monthly inflation rates when annualized are very near the Fed’s target range. Also recently, economic growth has slowed significantly as consumers have curtailed their previous aggressive spending. Surprisingly, job creation continues at a modest pace while unemployment has barely budged from its historic lows.

3rd Quarter Update Summary – Market Forming a Base

Although the stock market has suffered immensely from higher interest rates, there are now signs that inflation has peaked and is beginning to recede. The backup in container ships at ports has ended and container rates have returned to pre-pandemic levels. Lumber prices have returned to normal. Oil, gasoline, natural gas and commodities prices are returning to normal. Gold and precious metals prices have been falling most of this year. However, despite dramatic increases in mortgage interest rates, the housing market has slowed significantly and, somewhat surprisingly, has been modestly resilient. The largest component of economic growth, consumer spending thus far remains unfazed and together with the retail industries are contributing to the on-going stability of employment and jobs market. Consumer spending and the services industries have proven to be sufficiently steady to contribute to inflations stubbornly high levels.

2nd Quarter Update Summary – Global Inflation, the Fed, and the Fed.

The financial markets since the beginning of this year have been some of the most volatile that we’ve seen in several decades. And not without good reason. The post-pandemic post-stimulus economic rebound together with supply channels straining at the limits to meet the pent-up demand was further complicated by sanctions imposed on Russia. This strain on our supply channels have sent global inflation to the highest levels in decades. Add in the energy disruptions of the Ukraine war, gasoline and energy price increases have taken a big toll on the markets and the economy. Take note, inflation is not just a U.S. domestic phenomenon. It is global. This fact alone tells us this is not necessarily a dollar monetary problem for the Federal Reserve alone to deal with. It involves many factors beyond those mentioned above and which are largely beyond its control. The Fed however, has no choice but to make its best effort to deal with it with the few tools at its disposal.

1st Quarter Update Summary – Covid & Inflation, and now War

This was a rough start for the year in account performance. The markets are being hit with a triple whammy of Covid surges, rising inflation and interest rates, and war in Eastern Europe. Covid has become relatively benign here in the U.S. but has been surging in Europe and Asia. This surge has caused additional lock-downs that complicate production and efforts to revive supply chains. It puts new pressures on distribution channel bottlenecks. All of this has exacerbated otherwise modest inflationary pressures and puts the Federal Reserve in a precarious bind. All this while a new hot war has broken out in Eastern Europe that threatens to disrupt energy supplies and distribution of the most important raw material while also re-arranging global trade and geopolitical alignments for decades to come.

Year-end Summary 2021

Our accounts have performed very well again this year. Despite economic headwinds from Covid related restrictions, distribution channel disruptions and labor shortages, the economy ended the year very strong albeit with some inflationary pressures. The Federal Reserve is becoming increasingly concerned that this inflation is not merely a temporary transitory effect from supply disruptions, but that we are running the risk that inflation is becoming entrenched.

The Fed has been quite vocal that in the near future it will be winding down its quantitative easing monetary stimulus operations and will also start to raise interest rates possibly as soon as March. The strong reaction from the markets in response to these comments indicates that these anticipated monetary tightening actions will likely result in severe negative market and economic consequences beyond taming inflation. Intuitively, it seems unwise to try to contain inflation shortly after a massive Omicron surge that has already been a disruption to the economy and a cause of some degree of the inflation. As long as the Fed persists in its projected course of action, we believe the markets will continue to be highly volatile.

2nd Quarter Update Summary – Inflation, Fiscal Stimulus, Covid

The economy continues to grow and expand in recovery from the economic covid shocks inflicted on employment and production last year. Following a flat first quarter, the market has resumed an upward but volatile trend. Some recent inflation is sending warning signals across the economy, however, this inflation does not necessarily derive not from excess cash in the economy, but significantly from insufficiently restored production and supply chains, and from other distribution bottlenecks. The Federal Reserve is convinced the inflation is transitory and insists its expansionary policies will not change until at least 2023 or until the economy reaches full employment together with signs of overheating. This means, importantly, that going forward Fed policy in response to inflation will be more reactive vs predictive.