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August 2022 Q3 Economic Commentary

The first half of 2022 was the worst for the markets in over 50 years [1]. Through the end of June, major indexes including the S&P 500 had declined by over 20% with the Nasdaq down over 30%, giving back much of the performance the markets delivered over the past two plus years. Worsening matters, traditionally conversative instruments such as corporate and treasury bonds suffered their worst 6 month stretch since George Washington was President [2]. Fortunately, in late July we began a bear market rally which helped the markets recover some losses going into August. As of August 19th, 2022, the S&P 500 is down only 11.11% for the year and the Nasdaq is down approximately 19% [3] [4]. A bear market rally refers to a sharp, short-term rebound in share prices amid a longer-term bear market decline [5]. Debate continues among economists and asset managers as to whether we are in fact in a recession. Based on a technical definition of a recession, which is back-to-back quarters of negative GDP growth, it may be assumed that we are in a technical recession. Recession doubters point to the strength of the labor market as a mitigating factor. Unemployment in the U.S. as of July was at 3.5% [6] and we continue to have a labor shortage with approximately double the number of job openings compared to unemployed people. If we accept that we are in a recession, on average it has taken 495 days or approximately 16 ½ months to recover when there is a bear market tied to the recession [7]. Based on history, this would place us in a much stronger position going into the second half of next year and into 2024. Historically, bull markets, going back to 1932, last an average of 3.8 years and I believe that the next bull market in the U.S. will be one of the more robust in our lifetimes [8]. I hold this view for a multitude of reasons. First, S&P 500 company balance sheets are holding cash levels of $1.5 trillion more than what they had in 2019 [9]. This positions many companies to better withstand economic downturns. Second, the challenges of the past 4 years have forced countries to reevaluate supply chains and trade agreements. In the U.S. we have seen increased energy around shifting more of our supply chain back into the U.S. and away from more adversarial countries. Long term this will be significant advantage for us. Third, our companies are leaders in the Global technology space and innovation continues to be driven by US based talent.

The four primary reasons for our current state, which were highlighted in the last e-mail, remain our greatest challenges in the near term. Inflation, while easing in July, remains at a multi-decade high. The Fed is clear that they will remain aggressive with increasing rates until they see a dramatic downturn in inflation which may take many months. The Russia Ukraine conflict is onging and China continues to take an aggressive stance on their Covid zero policy which has prolonged supply chain challenges. On a positive note, gas prices in the U.S. dipped below $4 a gallon for the first time since March and commodities overall have come down quite significantly in recent months [10]. This easing of prices absolutely helps the consumer.

While I see markets remaining under pressure in the coming months, there is much to be hopeful and resolute about. Quarterly corporate earnings remain robust! As of August 6th, 2022, with 87% of S&P 500 companies reporting, 75% of those companies reported earnings above estimates [11] and 70% reported actual revenues above estimates. This is higher than the 5-year average of 69%! Additionally, the forward 12-month P/E ratio is 17.5 which is below the five-year average of 18.6 which means expectations have come down some, meaning it may be more achievable for companies to outperform going into next year. As stated in the last commentary, inflation is showing signs of having peaked this year and U.S. consumer spending remains strong! Wages in the United States increased 10.25% in June of 2022 over the same period last year [12] so many more Americans are better equipped to navigate the current challenges we are facing. Deposit rates on savings accounts and CD’s have increased. And then there is history. I feel strongly that we are further along in this process then we were a few months back. We are also closer to the election cycle which should bring  more clarity and certainty to the political landscape.

I remain steadfast in my belief that over the long term, proper diversification and aligning your portfolio to your comfort level with risk remains a prudent strategy. Time and time again, it is proven that markets cannot be timed. No one has a crystal ball. Our best strategy is to be well-diversified, across asset classes and remain optimistic and vigilant during times of fear and panic. It is hard to believe that in a matter of four years we have gone through a trade war, the worst pandemic since 1918, geopolitical uncertainty, and the worst inflation since the 70’s, yet here we are, as strong as ever in my opinion. Our companies are some of the best in the world, providing goods and services to every corner of the earth. Our people are some of the brightest and hardest working in the world. I believe more strongly than ever in the long-term trajectory of the U.S. and global economy. We have needed a “re-calibration” of our market and change in our trade habits bringing what manufacturing we can back to the U.S. and diversifying our international manufacturing partnerships across ally countries. We continue to see some of this happening!

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