Everything, Everywhere, All at Once

It’s been said Bull Markets are born of pessimism, grow on skepticism, mature on optimism and die on euphoria. Could we be experiencing all four simultaneously? Having gains this year, it’s been hard to feel comfortable as most investors have the haunting feeling of failing upwards.

From the early 1980s through 2020, interest rates were on a downward trajectory. (When interest rates drop, bond values increase.) In the mid 2010’s when interest rates went negative in some areas of the world, we wondered who would be foolish enough to purchase bonds at these levels. Interest rates had to go higher at some point and when they did, long term bonds would be impacted the most. Well, with the collapse of Silicon Valley Bank and Signature Bank, we found two institutions that purchased those long term bonds. When depositors realized that these banks had large amounts of long term bonds that had fallen in value, they became concerned about the safety of their deposits and withdrew their funds. This created a run on both of these banks and the FDIC decided to step in. As of this epistle, the Federal Reserve has backstopped all deposits for both Silicon Valley Bank and Signature Bank. By doing so, they have calmed depositor’s concerns and hopefully have prevented any other contagion. As the days continue to pass without additional news, it appears that the crisis is in abeyance.

Inflation continues to decrease. At the end of March, the latest inflation data showed that inflation rose 5% over the previous 12 months, down from 7% in June of 2022. 5% is still high. At their March meeting, the Federal Reserve increased the overnight rate another 25 basis points to a range of 4.75% to 5%. As the Federal Reserve continues to raise interest rates, the economy will slow down which will put people out of work, raising the unemployment rate. This is all part of the Federal Reserve’s goal to regain control of prices. The debate centers around whether the Federal Reserve will push us into a recession in the process. We feel that if we do dip into recession, it will be short-lived.

As the U.S. economy continues to weaken, the Chinese are coming out of their COVID Zero lockdown. The Chinese consumer is flush with cash and ready to spend. We expect that the additional demand created by the Chinese consumer will provide a boost to the global economy. While we tend to invest in U.S. based companies, many of them have global exposure and will benefit from this growth.

The rise in interest rates is now benefitting savers. Cash in our money market funds is now earning 4.5% on an annual basis. Our cash position is still high, but we will continue to invest in promising opportunities.

Very Truly Yours,

Michael F Cantlon
Thomas E Guyett
Robert Gephart