Market Update

We want to take this opportunity to touch base with you again given the poor stock market performance over the past week.  We will try to communicate our thoughts below, though understand sometimes an email is not enough. If you would like to have a more in-depth conversation, please simply reply back to this note and we will reach out to coordinate a time to have our discussion.

To state the obvious, the stock and bond markets are clearly not happy with the high levels of inflation we are seeing in our economy and daily lives. We could put the blame on a variety of factors (supply chain issues, a war in Ukraine, etc.), yet what’s really important is how do we cure the problem and how long will it take to resolve itself. There are three aspects of inflation that are relevant here:

1. Inflation on hard goods – in general, this reflects all the ‘stuff’ we bought during the pandemic and consequently drove prices up and caused supply chain issues.
2. Inflation on services – think hotels, air travel, concerts, and all the experiences we missed out on and now want to spend money on.
3. Inflation in food and energy – higher food and energy prices typically start to go up when an economy is improving, yet this was exacerbated by the war in Ukraine.

Putting all these together, it appears that inflation on hard goods is beginning to decline as consumers are pivoting away from Amazon purchases, and for the time being are spending that money on services. Our food and energy prices remain high, but at some level, these higher prices will cut into demand and therefore lead to lower prices as well.

The last factor that plays into all this is the Federal Reserve. Their job is to raise interest rates enough to discourage demand and thus lowering prices, but not so much that it throws us into a recession. Their job, however, takes longer to play out because raising interest rates on economically sensitive areas of the economy, like the auto and housing sectors, need time to take hold.

To summarize, all this leads to the simple fact that higher inflation leads to higher interest rates, and higher interest rates lead to lower growth, and the stock market does not like this dynamic. We feel that the performance of the markets this year has more than adequately reflected these risks, and therefore we would not be inclined to make any significant portfolio changes. In fact, we are optimistic that the path of inflation will begin trending down over the next couple of months and consequently lead to a much more stable and productive second half of the year.