Recession or Business As Usual?

When preparing to write our letter, we review our epistle of three months ago. After doing so, we considered changing the dates, updating the statistics and resending it. The majority of the themes in that letter are still true today. The Federal Reserve is still in the process of raising rates to slow the economy. Inflation is still high. The unemployment rate is still near multi-decade lows.

The war in Europe continues with an impressive showing by the Ukrainian army. Europe’s prior reliance on Russian energy is causing a severe slowdown for the European economy. If they aren’t in recession yet, they are on the cusp. The U.S. markets finished the third quarter at the lows for the year. The combined decline of both stocks and bonds has made this the worst year for investing since the great depression. Our strategy of covered calls and keeping a higher cash balance have helped to lighten the losses.

The current market discount is reflecting a high probability of recession in 2023. The Federal Reserve is attempting to engineer a soft landing, but does not have a good track record of achieving this in the past. Much depends on the American consumer who has previously proven to be a resilient spender. Psychology is crucial to a willingness to continue their profligate spending ways. Either way, we will be with you through this challenging financial period.

There is good news on the Medicare front. Medicare Part B premiums will decrease in 2023. Additional benefits from the Inflation Reduction Act will also decrease out of pocket costs for other medical expenses (insulin, vaccines, etc). Combine those changes with a projected 9% increase in Social Security benefits and there is a reason for retirees to look forward to the new year.

The rise in interest rates is now benefitting savers. Cash in our money market funds are now earning 2.4% on an annual basis. We still see a lot of potential for the stock market to improve moving forward. Our cash position is still high, but we will continue to invest in promising opportunities at these lower levels.

Very truly yours,

Michael Cantlon
Thomas Guyett
Robert Gephart