·         Earnings season kicked off this past week with mixed results coming from the banking sector, especially as it pertains to loan origination, loan loss reserves and their outlook for the economy.  In fact, the earnings being reported during this season may be less telling than the outlook of those companies reporting as well as the response of the shareholders (buy/sell) to that outlook.  As we noted last week, “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.”

·        Is it is possible that as we head into the height of earnings season that they will take a back seat to other issues?  Probably not. However, it is important to keep an eye on the recent shut down of the Nord Stream 1 pipeline that runs under the Baltic Sea from Russia and into Germany.  The pipeline, which has been closed for maintenance and is due to reopen around this coming Friday (July 22) accounts for a sizable percentage of natural gas supplied to the European Union.  In fact, Russia provides approximately 47% of the natural gas that required by the EU.  It is one of the cards that Russia can play should they choose to weaponized energy.  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.

·         The outer bands of what Jamie Dimon, CEO of JP Morgan described as potentially an economic hurricane, have begun to hit shore.  According to a statement released by JP Morgan along with their earnings this past week, Dimon stated that the bank is “dealing with two conflicting factors, operating on different timetables.  The U.S. economy continues to grow and both the job market and consumer spending, and their ability to spend, remain healthy.  But geopolitical tension, high inflation, waning consumer confidence, the uncertainty about how high rates have to go and the never-before-seen quantitative tightening and their effects on global liquidity, combined with the war in Ukraine and its harmful effect on global energy and food prices are very likely to have negative consequences on the global economy sometime down the road.”

·        On an optimistic note, Taiwan Semiconductor, the behemoth that has 2/3 share of the global chip market, noted in their earnings release that it expected a double digit increase in revenue growth, perhaps a sign that the global chip glut was overstated as perhaps the global slowdown as well.  Once again, time will tell.  On a related note, currently the share of the global chip market represented by U.S. companies is 12% today as compared to 36% in 1990 making it very important for the legislation known as the Creating Helping Incentives to Produce Semiconductors for America Act or CHIPS Act to pass during this congressional session.

·        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 3.13% and 3.05% versus 2.93%.  Many market pundits will point to this as evidence of a looming recession.  At this time, a technical recession is likely, the depths of which cannot yet be determined.

·         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.

·        An Important Note Regarding the Table Titled, “Select Sector SPDR Exchange Traded Funds (ETFs).”  In an effort to provide a more concise, definitive picture regarding the performance of the equity market, this data, a broad basket of eleven market capitalization weighted, industry-specific ETFs will replace the “Dow Jones U.S. Total Market Industry Groups.”

·         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 15.79% 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 10.01%.

·         The upcoming week will feature the release of several key economic indicators.  These include on Tuesday, June Housing Starts; on Wednesday, June Existing Home Sales; and on Thursday, the Weekly Report of Initial Claims for Unemployment Insurance and the June Index of Leading Economic Indicators (LEI).

·         The corporate earnings season ramps up this upcoming week with several key reports expected to include Bank of America (BAC), International Business Machines (IBM), Charles Schwab (SCHW), Goldman Sachs (GS), Lockheed Martin (LMT), Johnson & Johnson (JNJ), JB Hunt Transport (JBHT), Netflix (NFLX), Alcoa (AA), Biogen (BIIB), CSX (CSX), Abbott Laboratories (ABT), United Airlines (UAL), Elevance Health (ELV), Tesla (TSLA), AT&T (T), Union Pacific (UNP), Danaher (DHR), Verizon (VZ), Nextera Energy (NEE) and American Express (AXP).

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