In March of this year, I published a cautionary piece for investors and consumers. It can be found on our website by visiting this link. My concern was a Federal Reserve that was way behind, analysts and economists were way too bullish, and a consumer that was outspending its means, even in a strong economy. I had taken a very defensive posture for clients, our quants were some or all cash, short term Treasurys, or cash equivalents, and our hedge strategies had really begun to see their underlying protections grow in value. We’ve seen bonds continue to plummet as rates rise, a yield curve inversion (and another one today), and a Fed that has finally decided that it was wrong all along.

With the SP500 technically entering bear territory today (20% peak to trough decline), I noted in March that regardless of the definition that we were in a bear market if you peeled the layers of the onion back. The issue with the markets today is that we really do not know how long inflation will persist, we don’t know how the Fed will counteract this force with policy, and we don’t know how their policy changes will ultimately cool these pressures off. As I mentioned in March, the likelihood of a soft landing by the Fed (raising rates enough to slow the economy down but not create a recession) was not very good, and as we sit here in mid-June, I think that likelihood is even lower.

Economic slowdowns and recessions are part of the normal economic cycle. We have booming economies with bull markets, contracting economies, recessionary economies, and recovering (expanding) economies. Each phase of this cycle will happen several times in our lives at some point. As a Fiduciary, my job is to act in the best interests of my clients. As things became obvious late last year and into early this year that this was not just a normal, run-of-the-mill tightening cycle, I advised clients that we do not buy into the falling market, but that we take money off the table when the market has its classic bear market rallies. We are holding the most amount of cash that I’ve held for clients in my career thus far, and I do not see this changing until the proper catalysts arrive. I’m not sure how you could not want to take a more defensive position ahead of this.

As I write this today, household savings rates have plummeted, credit card balances have soared, and we continue to see data that suggest a further slowdown in the economy is forthcoming. It’s hard for me to see a situation where we do avoid a recession, but like every other one we’ve had before it will provide an entry point for investors to buy assets at much lower valuations…if they have some cash to invest when the time comes.

As always, thank you for taking the time to read.

Mike Lambrechts

Managing Partner