Commentary

Well, that was not fun. The second quarter of 2022 proved to be a much more difficult investing environment than we had initially anticipated. Inflation which we believed would begin to show signs of improvement, never improved. In fact, it got worse. The April and May price reports exceeded expectations and markets swooned. Despite, some fundamental and cyclical signs of improvement, the headline inflation prints of 8% to 9%, were too much for the market to bear.

Markets contended with a trifecta of economic and geo-political worries this past quarter which created a very challenging environment for investors. A continued spike in inflation, a meaningful change in Federal Reserve policy and an outright war in Europe all had a negative impact on investor sentiment and returns. Somewhat amazingly, Covid-19 fell from the headlines as people quickly focused on new sources of concern, particularly the conflict in Ukraine.

The following is an excerpt from a longer article published by Victor Canto, PhD, who serves as an economic consultant to TPCM.  To inquire about the full article please visit LaJolla Economics website.    

It goes without saying that the military conflict in the Ukraine over the past two weeks is very disconcerting and has caused great anxiety and worry to us all.   The conflict remains very hot and signs of a diminishing of hostilities appear elusive. First and foremost, we hope and pray for a swift, peaceful, and just resolution of the war between Russia and Ukraine. It further goes without saying, that this anxiety has manifested into greater volatility in investment markets. 2022 has begun poorly as inflationary concerns and expectations of Federal Reserve tightenings pushed asset prices down across virtually all major investment types. Prior to the Russian invasion, both equity and bond markets had posted sharp negative returns. Despite the anxiety and volatility, we do believe it is important to maintain broader perspective and continue to focus on economic fundamentals which we ultimately believe will drive markets. Historically, geo-political events such as the Russia invasion, are not meaningful market disruptors.

Despite lingering concerns and anxiety regarding the Delta and Omicron variants of COVID-19, a multitude of supply disruptions and meaningfully rising inflationary pressures, the economy continued its expansion in 2021 and US equity investors were compensated handsomely for remaining committed to the recovery story. For the year the S&P 500 rose nearly 30% without a meaningful correction. Astonishingly, the three-year annualized return of the benchmark equity index exceeds 25%. So much for the detrimental effect of COVID on equity investing. Much has been made of the policy boost, particularly monetary policy, which clearly has been a tailwind for markets during the COVID period. Yet one needs to give credit where credit is due. Corporate America has executed extraordinarily well in this recovery period and earnings per share for the S&P 500 are now at all time highs.

Today's VicTalk focuses on "Bidenomics" and why Victor believes the assumptions underpinning the Build Back Better framework won't necessarily result in the anticipated increases in aggregate demand and supply, and thus economic growth, that the Biden administration is hoping for...

The following is an excerpt from a longer article published by Victor Canto, PhD, who serves as an economic consultant to TPCM.  To inquire about the full article please visit LaJolla Economics website.     A major assumption behind the Biden administration economic policy is that government spending drives the economy’s aggregate demand. The policy implication yielded by this approach is a simple one: more spending leads to higher output and employment. In other words, in our opinion, the Biden administration is trying to spend its way into prosperity. We refer to this economic framework as “Bidenomics”.

Today's VicTalk focuses on inflation and, more specifically, why Victor believes that PCE inflation figures are primarily driven by supply chain constraints and will not result in sustained inflation readings.  

Investors love passion and conviction. “I saw an analyst on CNBC the other day. She loves Tesla. She’s all in.” “My hedge fund manager is so confident on Bitcoin, he’s taken a 25% position.” Sentiments such as these typically draw praise from investors as they represent a confidence which is often contagious. And why not be confident? Since the depths of the COVD-19 crisis, the US equity market has been a wealth creation machine. The S&P 500 is up over 70% since the March 2020 low, and there are numerous companies that were written off as dead that have posted, once in a lifetime, outsized gains.

We’d like to thank our summer analyst interns, Max Persico, John Schreiber and John Hufnagel for all their help this summer and putting this important research piece together for us and our clients.   Inflation concerns continue be at the forefront of investors’ minds, and rightfully so. The CPI and PCE data over the past few months suggest inflation is a legitimate threat to the strong economic recovery. While Fed Chair Powell has stated that recent inflation strength is reflective of temporary pressure from supply chain constraints, he has also stated, “As the reopening continues, bottlenecks, hiring difficulties, and other constraints could continue to limit how quickly supply can adjust, raising the possibility that inflation could turn out to be higher and more persistent than we expect.” At TPCM, we continue to believe the inflation scare will be transitory, and the bond market rally over the past few months appears to agree with us. We have examined the July CPI and PCE reports to identify key drivers of recent inflation prints and then delved into recent company commentary for further clues as to when we can expect supply shortages to sort themselves out.