I hope you are enjoying being out and about this summer with friends, family, and loved ones.   While pandemic risks remain omnipresent, I am grateful we are able to enjoy a return to a more ‘normal’ environment of interacting with each other.

2022 has been far from ‘normal’ insofar as capital market conditions are concerned.  We anticipated the year would be volatile year given the various balancing acts that people, businesses, and government officials would have to contend with in order to satisfy often competing requirements.  This year takes the cake in volatility, and I cannot recall in my professional career ever analyzing such conflicting economic and market data.  You can flip pages in the newspaper and read wholly different data and confusion reigns.  As we pass midyear, I believe it is helpful to look back and objectively assess how these balancing acts have played out so far from a pragmatic perspective.  Hope is not a strategy, but neither is fear.

Earlier this year, I expressed the need to consider utilizing a different portfolio playbook because of structural changes in the economy in the years to come – primarily higher interest rates and persistently higher inflation.  I believe we are beginning to see this take place.  While we may have been headed in this new direction, COVID-19 and the subsequent excessive stimulus along with the Ukraine/Russian war have accelerated this fundamental shift.

When I feel there is substantive or structural change that could affect capital markets like we have been discussing, I look for a historical reference of similar circumstances to help guide or frame our thinking.  One of the greatest challenges right now is that while there are elements of several past periods, there is no one historical analogue that we can reference – circumstances today are without a true historical precedent.  Because of the cross currents and confusion, I believe investors will likely need to be more tactical and flexible than perhaps we were in the past.  

These cross currents and confusion are adding to the fears of an imminent recession.  In my opinion, the weight of the evidence does not suggest a recession, although I would certainly not describe the current U.S. economy as vibrant or healthy.  Inflation is creating huge economic strains, and pressures on both individuals and families, as well as corporations.   We need to diligently monitor economic output for signs of cracks, particularly in regards to consumer confidence, employment trends, construction, and access to capital for small business owners.

We are witness to the consequences of all of this unprecedented intervention and stimulus from COVID as inflation has skyrocketed over the past year.  I stated earlier that we can’t inject 40% more money into the system and expect there be no consequences.  The Federal Reserve’s policy has switched from doing ‘whatever it takes’ to keep the economy and markets propped up, to doing ‘whatever it takes’ to slam on the brakes.  The outcome has been far from enjoyable.  The good news is that it appears inflation may have peaked in the near term; however, I believe it will remain structurally higher in the decade to come.  In addition, after this week’s Federal Reserve meeting, much of this tightening cycle will be behind us.

While there is plenty of negative news to focus on, I am guardedly optimistic that the worst of the inflation and market selloff is behind us.  Inflation appears to be moderating, many areas of the economy are exhibiting strength, and the U.S. dollar is currently at twenty year highs.  Cross currents and confusion prove problematic and make for difficult conditions.  However, I feel that those of us who stick to our plans should be positioned well to weather the storm.  We have experienced turbulent times before and have come out the other side better off. 

Thank you for your continued trust and confidence.  Please feel free to call or e-mail me with any questions or concerns, or if there is anything we can assist you with.

Best personal regards,
Erik Melville, CFP^®
Senior Vice President/Investments
(772) 672-5125 | [email protected]

^{Past performance is not indicative of future results.}