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.

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 – 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.