· Although quite difficult during these stressful times in the financial markets, we all have to relax, take a deep breath, be thankful for what we have and recognize that bear as well as bull markets are part of the reality when investing and that long-term growth can only be achieved when both are part of the process. Furthermore, this is the fourth time since the financial crisis ended in March 2009 that the S&P 500 has corrected at least 19% and the eighth ten-plus percent pullback.

According to Bespoke, and not including 2022, eight times the S&P 500 has fallen at least 15% over one quarter and seven times by more than 20% over two. After every such event the index has been higher one year later. In fact, after this occurred during the Great Recession it was 23.45% higher one year later.

Despite the above, as we have for quite some time, we do expect the volatility to continue until there is hard data as to the leveling of inflation. Unfortunately, and as noted prior in our opinion, this will most likely not occur until toward the end of the summer.

· The Open Market Committee of the Federal Reserve (FOMC), the body that determines monetary policy, to include the direction of interest rates, concluded a regularly scheduled two-day meeting this past Wednesday during which they decided that a 0.75% increase in the Federal Funds rate was necessary to combat the recent surge in inflation. This can be defined as the rate charged between member FDIC banks for overnight loans of excess reserves and is the foundation from which many other rates of interest are predicated upon.

The official Federal Reserve Press Release noted the obvious, that “inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures.”

Although we sincerely applaud the Fed’s recent stance on fighting inflation, in our opinion the Fed has to be careful to not tighten too much as monetary policy works with a lag. In addition, higher interest rates will do little to correct the disruptions in the supply chain other than through demand destruction. Too much of which will prevent the Fed’s much sought after soft landing. The Fed next meets on July 26-27 and then again on September 20-21. At this time we expect increases in the Fed Funds rate of 0.50% at each, but are hopeful that between now and September enough evidence of economic softening will have accumulated to necessitate only a 0.25% hike during that meeting.

· Investors certainly know that there is a lot of uncertainty. Eventually, some of these uncertainties will sort themselves out, prices will have taken into consideration the uncertainties or investors will tire of the uncertainties and begin to focus on their long-term objectives rather than on the current market malaise. This is the human condition. Think of tragedies in our lives. Long-term optimism is replaced by a shorter-term self-absorbed focus which in time is once again replaced by that longer-term optimism. The bottom line is that eventually investors will begin to become less absorbed with the day-to-day negative price action of their portfolios and once again focus on the longer-term benefits of investing. As the fear subsides, so will the panic selling and the financial markets will settle down.

· 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.

· Market internals such as the number of stocks making news lows as compared to new highs as well as the repeatedly bad breadth (declining stocks as compared to advancing ones) are two indications that the market is attempting at least a short-term bottom. However, a spike in the fear gauge as measured by the VIX (CBOE Options Index) has not yet risen to levels necessary for an “all clear” signal.

· 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.

· The yield on U.S. Treasuries spiked all along the curve. Most noticeable, the yields on the two, five and ten-year notes rose to 3.17%, 3.34% and 3.25% from 2.66%, 2.95% and 2.96% two weeks prior. It is our belief that the global equity markets will most likely continue to be held hostage by movements in interest rates.

· At this time, we can rest assured that this housing market is not at all similar to the one that caused the Great Recession in 2008-2009. According to the Black Knight and as reported by Diana Olick on CNBC consumer credit scores are substantially higher, there exists record home equity of $11 trillion, only 2.5 million of current mortgage are adjustable as compared to 13 million in 2007 with only 1.4 million set to reset as compared to 10 million and interest only mortgages are nearly non-existent. However, this will not prevent at least a slowdown in housing as is measured by recent data surround New and Existing Home Sales. With interest rates hovering around six percent, this slowdown will most likely persist for a while.

· At the current time, there is room as well as the necessity for both tactical as well as strategic investing in one’s portfolio, even for long-term investors. The former being quite active, driven by fundamental analysis with purchases or sales confirmed by technical analysis while the latter being much more passive. As predominantly strategic investors, we will work hard to better inform our clients of the need for more tactical investing and work on better executing this discipline.

· The financial markets (especially the stock market) rise on fundamentals, but fall on technicals. Currently, technical analysis which identifies trends or patterns in an underlying security, industry, etc… rules the day.

· Can we blame at least some of the volatility on the fact that this is a Mid-Term Election Year? Quite possibly as according to statistics gathered by U.S. Bank and published on March 4, 2022, the average return of the S&P 500 during the year of the midterm through October 31 was 0.3%. During non-midterm years the rate of return averaged 10.7%. Furthermore, from November 1 of the midterm year through October 31 of the following year the S&P 500 rose by an average of 16.3%. As an aside, please note that during each of the 16 periods following the midterms noted above, the S&P 500 was always higher.

· The Vanguard Balanced Index Fund (VBAIX), somewhat of a proxy for balanced investors has fallen 18.86% year-to-date 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 11.51%.

· The upcoming week is relatively light in regard to economic reports. That said, investors will receive some information on the health of the housing market. On Tuesday, May Sales of Existing Homes; on Thursday the Weekly Report of Initial Claims for Unemployment Insurance and on Friday, May New Home Sales.

· The corporate earnings season is left with just a few stragglers prior to the beginning of the next during July. Nevertheless, there are some important reports expected this coming week. These include Lennar Corp (LEN), H&R Block (HRB), Winnebago Industries (WGO), KB Home (KBH), Fedex Corp (FDX), Accenture (ACN), Darden Restaurants (DRI), and Carmax (KMX).

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