2Q 2022 Letter from the CIO

July 6, 2022

Let me start by saying I hope that you and yours were able to enjoy July 4th and the long weekend. There has been no shortage of turmoil in and out of financial markets this year, but hopefully you were able to spend some time with friends and family.

The Market Commentary goes into the details of what happened this quarter and in the first half of 2022, but suffice it to say, it was ugly all around.

Stocks, bonds, digital currencies, no asset class was really spared from Jay Powell (aka Clubber Lang) and the Federal Reserve (Fed). To paraphrase the scene from Rocky III where Clubber is interviewed before the second fight with Rocky – “Clubber (Jay) what’s your prediction for the fight (financial markets)? Prediction? Yes, prediction. Pain.” While the quarter was not trending particularly well leading into June, the upside surprise in the Consumer Price Index (CPI) on June 10 and subsequent 75 basis point hike by the Fed on June 15 is what really seemed to push markets lower in the second half of the month. Interest rates initially spiked higher as you can see in the chart below but have since fallen significantly as concerns about inflation have transitioned to worries about a recession with softer economic data around the world. While we review the circumstances that got us where we are and possible historical parallels for insight, it’s important to remember there’s a reason they make the windshield much bigger than the rearview mirror. We need to focus on where we are going more than what is behind us. I must pause and give credit here to our own John Decker’s late mother, Nancy Decker, for that great insight.

I mentioned in my Stock Market Overview that this was the worst first half for the stock market since 1970. Any similarities between 1970 and 2022? Glad you asked, yes quite a few in fact. It was a mid-term election year; M2 (money) growth had contracted sharply, the core PCE measure of inflation was 4.7% and the US government was spending significant dollars on the Vietnam War. These are all nearly identical circumstances we face today except we are spending money on the war against Covid and now in aid to Ukraine. We also had a recession in 1970. Judging by the estimate for second quarter GDP by the Atlanta Federal Reserve (currently -2.1%), we may be in a recession now. What did stocks do in the second half of 1970? They rallied more than 25%. This is not a guarantee or even a prediction for the next six months of 2022, but interesting to note nonetheless. The chart below left shows how pervasive the fears of a recession have become. This is the story count on Bloomberg that mention the word recession.

 

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