The Halfway Point 

While we have just reached the halfway point of 2022, for what it’s worth in seemingly much faster fashion than prior several years, likely due to the various lockdowns that we endured, even with such seemingly speed of time, there has been a tremendous amount of interesting events that have occurred so far this year! 

All about the FED, once again 

After multiple years of Federal Reserve stimulus both through lowering of interest rates and large asset purchases, as the calendar turned the federal reserve, FOMC, led by Jerome Powell pivoted and moved their foot from the accelerator to the brake. Not only has the FOMC pivoted to the brakes, but they have put both feet firmly on said pedal. First talking aggressively about rate increases leading up to the fastest interest rate increases on a percentage basis that have ever occurred, putting headwinds in safe assets also known as bonds or fixed income, but the other foot on the pedal included reversing asset purchases through balance sheet runoff. 

The first glimmer of easing of the brakes by the Federal Reserve occurred several weeks ago in a public testimony by Jerome Powell in which he stated the federal reserve cannot control oil and food prices. Capital Markets participants read that to be not as aggressive in posture, maybe one foot easing off the brake. 

Literally the last week of the quarter, the second major event occurred oddly enough from the research partner at the Atlanta Federal Reserve. The Atlanta Federal Reserve research department has a forward looking predictive model that attempts to predict GDP (gross domestic production), the most blunt instrument of economic activity. Just days ago, they updated their model from an expectation of 1% growth in Q2 2022 to -2.1% growth or an actual contraction. While seemingly unimportant, this estimate if true would mark the official R word for the economy – Recession. This second event was even more impactful as market participants began pricing in an even less firm brake pedal fed.

Persistent hot CPI Consumer Price Index reports present challenges 

Back to the Jerome Powell lead FOMC, one of their favorite inflation measuring sticks, the CPI or Consumer Price Index a very blunt measuring instrument of price increases and inflation measures, looks to remain high, mostly due to the severe lag effects of some of the input data. This puts the FOMC in a pickle, with the aforementioned possible R word and a slowing economy, but lagging blunt measurement showing high blood pressure in the economy a.k.a. the CPI . Not a fun time to be a member of the FOMC! 

How about some positives? 

In our latest newsletter, hopefully already on your reading table, we point out in multiple graph format tons of positives. While some may say were looking through rose colored glasses, we prefer to say the glass half full. Of course, these can change, but the pictures we pointed out at the time, were positives. 

Time is our friend on all of these matters, be sure to avoid the ugly headlines which most certainly will continue likely throughout the remainder of this year, we have your back and will talk to you at the end of the next quarter! 

Sincerely,

John A. Kvale CFA, CFP

Enclosure (2022 Report)

Remember when we were kids and it seem like the birthday would never come? Now they seem to come on almost a quarterly basis!

Speaking of a quarter, as we look back over the first quarter of this year, 2022, Wow, we had a lot of things occur.

Interest Rates

As the calendar turned, the FOMC, led by chair Jerome Powell, reading very rearview mirror inflation data points, began verbally discussing aggressive rate hikes.  Right on cue fixed income participants front ran the Fed and raised interest rate across the board.

Mortgage rates, specifically 30 year fixed mortgage rates have risen in percentage terms faster than any time in history.  This is likely a product of the stopping of monthly FOMC purchases of mortgage back securities. It would not be unreasonable to think that current levels could be an overshoot from the artificial downward pressure the federal reserve had been creating.

As of late, several Federal Reserve Presidents have publicly doubled down on even more aggressive rate increases, pushing rates even higher.

Longer-term, recall increasing interest rates are headwinds to fixed income instruments initially, but higher interest rates mean greater income longer term.

Fiscal Stimulus Comparables

As we exit this quarter, and enter the next, we begin a journey over one of the most interesting comparable times in history. As noted in our Q1 and Q2 newsletter, tough comparables will likely make for a natural slowing of the economy. Recall last year at this time over $1 trillion of stimulus was pushed into the economy. As mentioned once again in our newsletter, this is a natural slowing and will be a tail wind to the federal reserve as they raise short term interest rates in an attempt to slow the economy.

And did we mention there was major Geopolitical conflict?

There is a saying that conflict is the great geography educator. Certainly it was a surprise to see the amount of resources that come from the two countries in conflict. The lack of resources on the natural market may be a headwind to lower prices of certain commodities..

In closing, the really good news is that much of what we have experienced in this past quarter, and the coming next quarter, in birthday like format may likely come and pass much faster than previously experienced.

Sincerely,

John A. Kvale CFA, CFP

Enclosure (2022 Report)