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May 2022 Q2 Economic Commentary

I hope all is well and that you are safe, healthy, and remain resilient and vigilant!

April finished on a low note and the first four months of 2022 have left markets shaken. The S&P 500 closed Friday, April 30th, down 13.3% representing the most difficult four-month period for the index since 1939 [1]. This squarely places the S&P in correction territory (a decline of more than 10% from recent highs) for a second time in 2022. Other major benchmarks such as the Nasdaq Composite Index and Russell 2000 have fared worse as both remain in bear market territory (a decline of more than 20% from recent highs). The Nasdaq has declined nearly 24% since November, with the performance year to date being its worst since 1971 [1] [2]. Similarly, the Russell 2000, a broad index of 2000 U.S. small sized companies is down over 24% since November [3]. When looking deeper into the selloff we note that individually several stocks, particularly technology and growth names, are down anywhere from 50% to 80% from highs reached in 2021. This has not been limited to small and mid-sized companies with several large and mega cap companies declining to levels not seen since prior to the pandemic, meaning much of the gains since late 2020 have been reversed. Normally, in market corrections and bear markets, bonds, for example, have been a safer haven. That has not been the case in 2022 with the iShares Core U.S. Aggregate Bond index down nearly 9% year to date [4].

There are four primary reasons for our current state. Inflation remains at a multi-decade high and continues to take a toll, especially with some of our most critical needs like food and gasoline. As recently as last Fall the Federal Reserve considered inflation to be transitory and expected it to subside naturally as covid era shortages and bottlenecks resolved. Suddenly, in early 2022, the Fed finally acknowledged the severity of inflation and began raising interest rates to help control inflation. Mortgage rates jumped sharply as a result- a further squeeze on the consumer wallet. Many consider this delayed Fed response to be a critical policy error. Change is always difficult for the market to absorb, and the accommodative Fed policy that drove markets higher over the last several years dates back to 2008. The recent change in tone and action from the Fed represents a true paradigm shift. Dominant global powers, such as China, a key hub for manufacturing, continue shutting down for extended periods to contend with new outbreaks of the coronavirus. Finally, the Russian invasion of Ukraine has not only taken a heart-breaking toll on human life but had a ripple effect on prices of gas and food surging, placing Europe on the brink of recession and creating shortages of wheat and other commodities.

Where do we go from here? What are the positives that may bring us hope? There are signs that inflation may have peaked in March. U.S. consumers remain strong! Americans saved a record amount during the pandemic amassing excess savings of $2.5 trillion [5]. These savings have helped maintain positive consumer consumption, even with rising prices. The U.S. unemployment rate remains historically low at 3.6% [6]. In fact, we currently have 11.3 million job openings which means we have a record 5 million more job openings than we have unemployed people in the U.S. [7]. Employers have had challenges filling openings which has led to robust wage growth of 5.6% year over year [8]. Normally, this wage growth is a fantastic and necessary component of a thriving economy. Our challenge right now is lack of participation in the labor markets. The reasons for this range from people retiring, to women leaving the work force, to people deciding to work jobs in the gig economy- such as becoming influencers or working part time for services like Uber. Ideally, we need to see labor participation improve to maintain our generational innovative edge against our global competitors. Despite these challenges, robust wage growth has helped to lower the impact of inflation. Being a midterm election year, the post-midterm election period has historically brought relief to the markets with the S&P 500 delivering an average 12-month return after mid-terms of 16.3% [9]. We may also find some relief in the near term as the Fed is meeting on May 3rd and 4th and a rate increase of .50% to .75% is expected. Lack of clarity has historically been negative for the markets and any certainty the Fed provides may provide reassurance. Longer term, I believe everything we are enduring right now is paramount to our economic health and sustainability in the coming years. We absolutely need inflation to decline to normalized levels between 2 and 3% and just imagine, if we can maintain a 4-5% wage growth in such an environment, that will help everyone from lower income to middle class to upper class individuals and families. Additionally, the Fed is removing the stimulus that was injected into the economy during the pandemic and as this normalizes, they are increasing the tools and resources they have at their disposal to contend with the next time we enter a recession. I know it is painful right now and uncertainty and fear are high, but I passionately believe that we will be in a better place in the coming years, especially as we get later into 2023 and going into 2024. In the near term we may also get relief if any one of the three reasons shared above improve.

Client Centered

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 two years we have gone through so much, the worst pandemic since 1918 and the worst inflation since the 70’s, yet here we are, as strong as ever in my opinion. As we have throughout our history, we will overcome, and we will be in a better place. 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 are seeing some of this happening!

Thank you for the opportunity to serve you. My priority remains and always will be to ensure that you continue to receive high quality guidance and a client service experience second to none. While I continue to reach out via phone and e-mail, please know that I am available via Zoom, Facetime, any other digital technology you prefer and in person if you would like to meet. I am happy to meet with you at any one of my offices or at your home or near your home, whatever you prefer and with
whatever you are most comfortable.

Wishing you, your family, friends, colleagues and community continued hope, health and positivity in the coming weeks, months and beyond!

Thanks!

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