· After having closed the prior week at 31,899.29, at 2:00p Wednesday the Dow Jones Industrial Average was trading a bit lower at 31,853.59. At that time the Open Market Committee of the Federal Reserve (FOMC) issued a press release regarding their decision pertaining to monetary policy stemming from their just concluded regularly scheduled two-day meeting. The statement began “recent indicators of spending and production have softened.” By the end of the day the Dow had tacked on 344 points only to add another 332 on Thursday and 315 on Friday. What led to the rally? Simply put, the Fed’s recognition that they are perhaps in tune with the slowing economy and the impact that recent rate hikes as well as continued inflationary pressures and supply constraints have had on the American consumer.

Many view this as a bear market rally and we would not be too quick to discount it as such. However, we do believe that over the next quarter or so the Fed will soften its hawkish tones, thereby allowing equities to move higher. As we have noted over the past several weeks, “our base case at this time is for investors to expect volatility and perhaps more downside to the tune of five to ten percent, especially over the first half of the third quarter. However, as the quarter rolls on, investors will begin to focus on the opportunities within the financial markets rather than the risk thereby setting a floor and allowing them to proceed higher, albeit in an uneven fashion.”

· In addition to a less hawkish statement from the Fed, second quarter earnings from the likes of Microsoft, Amazon, Apple, Mastercard, Chevron and Exxon came in better than expected and provided guidance for the upcoming quarter that was also to Wall Street’s liking. That said, it was a case of the haves and have-nots as both Intel and Roku disappointed on both earnings and guidance so their shares were punished accordingly. As we have noted, quite often securities rise and fall on performance versus expectations rather than the absolute data.

· Solar stocks shone this past week as Senators Chuck Schumer (New York) and Joe Manchin (West Virginia) released a reconciliation package, entitled “Inflation Reduction Act of 2022” that would allocate $369 billion to battle climate change. The package includes funding and/or tax credits for individuals, corporations and municipalities.

· One of the emerging stories that will impact Western Europe directly as well as the global economy indirectly and one that we have been keeping our clients informed of for several weeks pertains to the Nord Stream 1 pipeline. This pipeline, owned by Gazprom, Russia’s state operated energy company supplies more than 40% of Western Europe’s total energy consumption. The pipeline which was recently down for “maintenance” was turned back on at 40% capacity for several days. However, this past week Gazprom announced that it has reduced the flow to 20% on account of “equipment repairs.” Once again, should the war in the Ukraine continue, we believe that the “weaponization” of Russia’s natural resources over the next six months to a year, is not only possible, but likely.

· On balance, we are still of the mind that this inflationary cycle is slightly more secular than transitory as we believe elevated energy prices (perhaps not at this level, but higher as compared to the past two decades) are here to stay as are higher wages. The impact of permanently higher wages will be felt more severely in the United States than in developing countries as we are a service economy. That said, we do expect wages to plateau shortly as the workforce reappears, having spent their COVID windfall. However, when and if the supply chain gets somewhat realigned manufacturing costs should stabilize as should the cost of shipping. We also believe that technology will begin to reassert itself as a disinflationary influence on production.

· The yield curve (the difference between the yields on different maturities of the identical securities, in this case U.S. Treasuries) has continued to invert in a meaningful fashion. The curve, historically a predictor of an economic slowdown, measures the relationship between like bonds of different maturities. In fact, an inverted yield curve has predicted every recession since 1955. That said, it has also predicted recessions when one did not occur. This past week, the yields on the two- and five-year Treasury Notes were inverted or higher when compared to the ten-year U.S. Treasury Note at 2.89% and 2.70% versus 2.67%. Many market pundits will point to this as evidence of a looming recession. At this time, a technical recession in the near future is likely, if not already here, the depths of which cannot yet be determined.

· Keep in mind that the stock and bond markets are anticipatory in nature, historically moving six to nine months ahead of the confirming data. It is precisely for this reason that investors hoping to “buy when things look better” never get the chance to do so. Unfortunately, by the time the economic data turns for the better, stock prices have already taken this into account. For example, during the pandemic, the stock market bottomed on March 23, 2020, just as the economy was shutting down. Three months later stocks had risen forty percent!

· In an effort to quell inflation and bring back the supply demand equation into equilibrium, the Fed has increased the Federal Funds rate four times this year, on March 16th by 0.25%; on May 4th by 0.50% and on June 15th and July 27th by 0.75% each. However, as noted above they run the risk of cooling demand to such an extent that the economy tumbles into a severe recession. Evidence of that risk can be found in the change in interest rates over the past two months as the yield on the 10-year U.S. Treasury note has fallen, despite the fact that the Fed has raised the Fed Funds rate by 0.75%, twice.

· Historical data provide a guide, a potential window to future events. Investors must keep in mind that after every bear market in the history of the United States, stocks have gone on to set new record highs. Furthermore, we have allocated your assets

for these trying times as well as those that are more fruitful. Regardless of this it is important to keep in mind that ultimately markets such as this test the patience, faith and resolve of even the most seasoned investors.

· A component to traditional, longer-lasting bear markets is the emotional strain it places upon the investor. Just as bull markets place pressure on investors sitting on the sidelines, bear markets exert the same force on those that have money in the market. Should the market remain choppy as we believe it will at least throughout the summer, you can count on a steady drumbeat from talking heads questioning the validity of long-term investing. We have regularly noted that unlike recent pullbacks, the recovery from this one will most likely be more of a process rather than an event and would recommend our clients to ignore the short-term and focus on your long-term objectives.

· The Fed has become too important in regulating the economy. Hopefully, when this is over, we can get to a more normalized economy with less overt Fed intervention. Recessions are necessary as they bring back into balance supply and demand. In addition, vis a vis creative destruction, recessions revitalize the economy, positioning it for a new era of growth.

· We continue to note the returns of the Vanguard Balanced Index Fund (VBAIX) to illustrate the all-encompassing extent of the selloff in the financial markets. VBAIX, somewhat of a proxy for balanced investors has fallen 11.64% through the close of business Friday, as in addition to the pullback in stocks, bonds, which comprise nearly 40% of the portfolio, have been under pressure. For example, the Vanguard Total Bond Market Index Fund (VBMFX) has fallen 8.39%.

· The upcoming week will feature the release of several key reports that will provide insight into the direction of the American economy. These include on Monday, June Construction Spending; on Tuesday, the Job Openings and Labor Openings Survey (JOLTS); on Wednesday, June Factory Orders; on Thursday, the Weekly Report of Initial Claims for Unemployment Insurance and June Trade Balance; and on Friday, the July Non-Farm Payroll Report, July Unemployment and July Consumer Credit Report.

· Earnings season rolls on! This week expect earnings from several companies that will provide a glimpse into the direction of the economy. These include Advanced Micro Devices (AMD), Caterpillar (CAT), Paypal Holdings (PYPL), BP, plc (BP), Starbucks (SBUX), Gilead Sciences (GILD), Booking Holdings (BKNG), CVS Health (CVS), Cigna (CI), Zoetis (ZTS), Duke Energy (DUK), Amgen (AMGN), Concophillips (COP), Eli Lilly (LLY), Toyota Motor and Alibaba (BABA).

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