September 7, 2022
“People pay for what they do, and, still more, for what they have allowed themselves to become. And they pay for it simply: by the lives they lead.” - James Baldwin
“You cannot do a kindness too soon, for you never know how soon it will be too late” – Ralph Waldo Emerson
You reap what you sow.
The economy and the consequences related to the Covid responses by individuals, government, and the Fed continue. Without delving into detail or rehashing our previous comments, let us acknowledge that volatility in markets is high and quite possibly will remain so. The emotional and unmeasured policy reactions to Covid will impact society and the economy for years to come. The recent bout of volatility seemed to kick off in reaction to Federal Reserve Chairman Jay Powell’s speech in Jackson Hole, WY on August 26. The S&P 500 index has fallen considerably since that day. The talking heads on the economy (both before and after his speech) bash the Fed because it views policy well behind the curve and they are worried about inflation. This has some merit as the Federal Reserve clearly left policy too loose in 2021. However, it is not surprising that the Fed reiterated that fighting inflation is their top priority. Powell’s tone was more forceful, I suspect, to show just how serious they are about fighting inflation. But there was not a lot of substantive change from what had been stated previously. Interest rates have risen since then, but not dramatically. Essentially, the market still expects the Federal Funds rate to rise to around 4% by the end of the year.
An update at summer’s end.
It is worth reviewing and updating our comments (in CAPITAL LETTERS) from July 20th’s market commentary (highlighted in yellow). Since July 20, the S&P is close to the same level. Interest rates are slightly higher since then which means borrowing money is more expensive.
I think the Fed has sufficiently communicated that they are taking inflation risks seriously and they are hiking rates aggressively. RATES ARE SLIGHTLY HIGHER NOW AND THE FED HAS REITERATED ITS COMMITMENT TO FIGHTING INFLATION.
Prices appear to be falling in many parts of the economy. RETAILERS SEEM TO BE LOSING PRICING POWER, INFLATION EXPECTATIONS ARE FALLING ACCORDING TO THE NY FED, AND OCEAN SHIPPING RATES ACCORDING TO THE WALL STREET JOURNAL ARE DOWN 60% THIS YEAR. *
Employers look like they are cutting back on hiring and wage increases. LAYOFF ANNOUNCEMENTS ARE PICKING UP PARTICULARLY IN TECH, CRYPTO AND HOUSING.
Employees seem to be going to the office more often. MANY BANKS ARE ANNOUNCING THAT EMPLOYEES MUST RETURN TO THE OFFICE. EMPLOYEES ARE REALIZING THAT COVID FLEX WORK IS COMING TO AN END.
Risk can be perceived as being reduced across most sectors of the financial and real economy. NEGATIVE SENTIMENT HAS INCREASED SINCE JULY 20 ACCORDING TO THE AAII SURVEY. **
Uncertainty around Russia, energy, and China are all high, but also well recognized. SAME STORY UNFORTUNATELY.
What is the plan? Our view has not changed dramatically in the past couple of months. We will continue to be patient and we believe our portfolios reflect our current probabilistic views. We believe in the growth prospects for the US and world economy in the coming years, and we will continue to focus on a long-term time frame to grow wealth. There are however actions we are taking currently, and we will continue to opportunistically take when the opportunities arise:
We will harvest tax losses where possible in your taxable portfolios to use against existing realized gains or use against future gains.
We continue to hunt for companies that are growing strongly, produce lots of free cash flow (producing strong free cash flow), and profits, and that do not require lots of external funding.
We expect the cost of capital to stay elevated for a longer period, and our focus will be on staying liquid and keeping your portfolio as simple and efficient as possible to achieve your goals.
Fixed income remains a higher weight in 2022 than in previous years to take advantage of the higher interest rates on offer.
We recognize that the US Dollar has reached levels not seen since the early 2000’s. This may weigh on profits in the near term for multinational companies, but it will also likely present opportunities in foreign markets as their currencies become cheaper relative to the dollar.
Despite the challenges to the US and global economy, we see the US consumer in good shape. Growth may weaken, but we see pain only in certain areas of excessive risk taking that benefited from the Fed’s zero rate policy (which is now over).
We continue to focus on the long-term opportunities available because of the transition to greener sources of energy and the required infrastructure upgrades necessary.
We see that companies and countries are making contingency plans to their supply chains globally. Risk in countries that do not align idealistically with western democratic ideals will be reduced over time.
In the near term, we see China as very pragmatic, and given the complexities of their near-term challenges, we believe they will seek to engage constructively and promote global growth. The long-term idealistic clash between China and the west is unlikely to change without significant turmoil inside China, but for now we do not see increasing risks from China to the global economy.
Joseph Cardello, Principal August Wealth Advisors, LLC 51 Riverside Avenue, First Floor Westport, CT 06880 Direct (916) 461-9451 toll free (800) 985-9477
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