Market Bulletin - June 13, 2022

The markets took a beating today. After rebounding from their low points in May, they have again turned downward confirming our belief that the positive market days over the last few weeks have been a “bear market rally.”  We have sold numerous positions throughout the year, continue to hold a sizable percentage of cash, and hold numerous high dividend producing positions.

From our Affinity Capital 3 Minute Digest May 11, 2022

… There is no straightforward way to describe the market sell-off we are experiencing as other than brutal. But we caution against equating your Affinity Capital portfolios with the overall markets. Your individual portfolios have held up well in relation to the major indices that are highlighted in the financial press.

Going forward we obviously see more volatility. While rebound rallies are likely, the trend is certainly down. The technology heavy Nasdaq has been the main source of trouble as it is primarily growth stocks, and they are the first casualties of a double dose of surging inflation and slowing growth. The Nasdaq is down over (25%) for the year, and we believe a further (8%) decline is likely. At that point, it will either be the bottom of this sell-off and a good point to invest or it is the top of the next downturn…

The Nasdaq as of today has dropped another 8% and is down 33% for the year. We have previously written that often as goes the stock price of Apple Inc. goes the market. Apple has held up well, given the circumstances of the overall market but its price has now broken key levels. When we couple this with the 10-year treasury yield ballooning to 3.36% it brings us to an inflection point that will provide a window to decisions going forward.

The Federal Reserve Open Markets Committee meets Tuesday and Wednesday. The Fed has taken strong actions in managing interest rates and monetary policy since the Mortgage Crisis in 2008. While a traditional rate hike or decline is 0.25%, the recent hikes and continued expectations are for 0.50% increases and now analysts are forecasting a hike as much as 0.75% on Wednesday. Our question is “How will the markets interpret a 0.75% hike?” Will it indicate a level of panic by the Fed or a welcome aggressive move to combat inflation? The Fed says that they follow the data, but “stagflation” brings conflicting data.

The purpose of raising rates is to slow down rising inflation which is traditionally a result of a rapid economic growth cycle. Our view is that current inflation is less the result of a traditional business cycle and more the result of an overreaction to the pandemic by flooding the economy with trillions of dollars in government support, supply chain disruptions and increasing gas prices. Meanwhile, we have recessionary indicators indicated by publicly traded companies reporting lower earnings, lower profit margins and less than optimistic business projections going forward. This combination of economic factors is often referred to as “stagflation” and this creates confusion about economic activity going forward. As we have often mentioned, markets like predictability but the conflicting economic measures and statistics of an out of sync business cycle creates market days like today.

As always, please feel free to call with any questions.