Hello Summer!
While it has not been a particularly warm summer so far, it is still far better than mid-January. Spring was also nice with enough rain to help get the flowers going, but not so much to be problematic. Spring clean-up is done and we await the hotter summer weather. We hope you all have had a nice spring and look forward to mid and late summer. Enjoy and be well.
Last quarter I talked about the Stock the Shelves (STS) program that our own John Seagrave helped to establish. I am so happy and proud of this fantastic effort. Here’s an update. In the past four months since it started, STS has collected over 4,000 lbs. of food and over $10,000 in cash. Just before July 4 the team delivered checks to six community food banks. Food donations can be accepted anytime at our Barron Financial Group office and cash donations can be made at the Northwest CT Community Foundation at www.northwestcf.org and searching for ‘Stock the Shelves’.
Last Quarter Round Up
The second quarter was a rough one for the markets. The S&P 500 was down -16.1% and down -19.96% for the year. International markets were down -14.29% for the quarter and down -19.25% YTD. Emerging markets were down -11.92% and are down -17.47% YTD. The general bond market was down -4.69% for the quarter and is down -10.35% YTD. Short treasuries were down -0.51% for the quarter and down -2.95% YTD.
Historically, this is a very strange looking market considering that the S&P 500 was up over 13% in the second half of 2021, then down close to -20% in the first half of 2022. It’s easy to let down markets like this play into our emotions. But, from our view, the pace of this decline has made it too late to sell, and perhaps, too early to buy. We just don’t think the current uncertainty is resolved and we could possibly see more lows in the next month or two. Markets are worried, and for good reason, that the Federal Reserve (FED) will raise rates so quickly and aggressively that the economy will get pushed into recession. We feel there is a 50-50 chance this happens. Our belief is that we should see improvements in the labor market and supply chain, which could ease inflation as we get into August. But, if those improvements come slower than we expect and the FED continues raising rates, we could see a recession in 2023, if not sooner.
Current Quarter Outlook
One important topic to cover here in the U.S. is tied to our Federal Reserve Bank (FED). After a surprisingly high inflation rate was announced for May, the FED increased interest rates at its June meeting by 75 bps (0.75%). This after FED Chair Powell had said at the May FED meeting that a 75 bps increase was off the table. Their surprising move indicates that the FED is feeling a bit behind the eight ball on inflation, and they need to increase rates more quickly than most everyone expected. This move has the stock market and economists worried that the FED may go too far and too fast with rates and result in recession. The challenge here is that we have three areas of concern for the economy: inflation, the labor market, and the supply chain. As the FED works to get a handle on inflation with interest rates, they may move the needle closer to recession. But the other two items have influence as well. The labor market and supply chains are both improving, albeit slowly. If they improve enough, it may offer some balance to increasing interest rates, and recession may be avoided. Our base case is that we feel we have a 50-50 chance of recession. Not the best odds, but we also feel it would be a relatively weak and short recession.
Globally, it makes sense to spend some time talking about Russia and Ukraine. As you all know, Russia invaded Ukraine on February 24, 2022 and for the most part did not have the best military showing in the early stages. Strategy, tactics, logistics and training all appeared to be lacking in those early days. At the same time, Ukraine showed remarkable resilience and presented a leader of incredible bravery to the world stage. The expected 72-hour collapse of Ukraine did not happen. All the while the North Atlantic Treaty Organization (NATO) was unifying an anti-Russia strategy by both supporting Ukraine’s military needs and imposing crippling economic sanctions on Russia. NATO hasn’t been this organized, unified, and relevant since the 1950’s.
But, from our view, we’ve shifted into a new phase in this war. This new phase of the war is showing Russia to be willing to learn from mistakes and adjust to the current reality. They are concentrating on the eastern to south-eastern areas of the Donbas region south toward Crimea. Remember, Russia has more men, more artillery, more armor and likely more reserves than Ukraine will ever have. Russia is now using a well-known, and well-established practice of scorched-earth tactics to utterly destroy not only Ukraine’s military, but they are purposely destroying all manner of infrastructure. The idea is to leave Ukraine a barren wasteland that can’t even support a rag-tag resistance. We believe the war is heading toward an end where Russia ends the fighting in exchange for annexing the Donbas region south to Crimea and Ukraine has little option but to agree to the deal.