The first quarter ended with a plethora of big headlines to shake the market and the resolve of stock and bond investors alike. At home, families and households are having to deal with a level of overall inflation that has not been seen in over 40 years, as the Consumer Price Index (CPI) registered 7.9% in February, the highest level since the 1980s. The expectation is that the Federal Reserve will hike interest rates 50-75 basis points in May and again in subsequent months to tighten the flow of money and attempt to stave off any additional inflationary pressure. The Fed has also hinted at shrinking their balance sheet, which has continued to balloon over the past decade adding to the price increases. We’re confident both of these actions will slow inflation, but at what cost? Tightening the economy as we potentially head into a cyclical decline may catapult the United States into recession while inflation is still high. This scenario is a painful reminiscence of the 1970s “stagflation.” Oil supply disruption and increased demand from the Covid-19 pandemic receding nationwide has led to multiyear highs in prices, as crude ended the quarter $105.96/barrel, a 40% increase from year end.

In February, the Russian Army invaded their peaceful neighbor Ukraine attempting to begin the reunification of the defunct Soviet Union. In his annual state of the nation address, Vladimir Putin called the collapse of the Soviet Union “the greatest geopolitical catastrophe of the century.” A destabilizing exogenous event such as this is indeed what we have been worried about for several years, as the markets moved along while maintaining an elevated level of overvaluation. Until the conflict is resolved and peace is restored, we anticipate heightened market volatility to be the norm.

For the first time since Q1 of 2018, the quarter ended with both major stocks and bond indices posting losses. For bonds, it was the worst quarter of returns in over 20 years, with the U.S Aggregate Bond index losing -5.9%. The S&P 500, DJ Industrial Average and NASDAQ Composite Index posted losses of -4.6%, -4.1% and -9.0% for the quarter. Internationally, the EAFE dropped -5.9%. The only two sectors ending the quarter at a discount to fair value were Communication Services at 76% and Financials at 95%. The most overvalued to end the quarter were Utilities at 110% and Consumer Defensive at 106% to fair value1. On a P/E basis, the S&P 500 ended the quarter overvalued by 45%, down from 72% from YE2021. One last noteworthy market condition to mention, the yield curve inverted briefly on April 1st, with the 2-year treasuries trading higher than the 10-year. Historically, recession follows 22 months after such an inversion on average. Given the major headwinds to stock and bond markets, we’re remaining extremely cautious with new purchases, choosing to wait for a lower market level to put new money to work.

We look forward to guiding all our clients through these challenging economic times, while continually earning your trust and your business.

Jack A. Kennedy

Chief Investment Officer