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Dear Clients,

To our Florida friends, we are thinking about you during this difficult time.

Let’s get to the markets with some analysis and random thoughts.

Needless to say, there is a lot going on in the financial markets. And the one thing markets (people) don’t like is uncertainty. We have quite a bit at the moment. For decades, the average portfolio, with a mixture of stocks and bonds, fared relatively well in most downturns. We are now experiencing an exception to this general rule. A balanced portfolio of stocks and bonds historically tamps down volatility. Portfolio returns, although varied at times, leave investors with less dispersion. They have a way of offsetting each other.

In the current environment, where liquidity is being drained from the financial system, at the same time interest rates are climbing, both of these asset classes are experiencing negative returns. We need to go back almost 100 years to have another period similar. Thus, a balanced portfolio is under more pressure than usual. The good news is that this has a way of bottoming and reversing course. And sometimes, dramatically. Take a look at the monthly returns on the S&P 500 index for the year. Timing when to buy and sell isn’t for the faint of heart. Investors with time on their side simply don’t have to play that game.

January (5.17%) February (2.99%) March +3.71% April (8.72%) May +.18% June (8.25%) July +9.22% August (4.08%) September (9.21%)

There are just so many variables to watch to determine the direction of the markets. The two that are of particular interest to us at the moment are the strength of the U.S. dollar versus currencies of other developed nations and the shape of the yield curve. Both impact inflation which the Fed is targeting by raising rates. Rising interest rates in the U.S. can strengthen the dollar. With a strong U.S. dollar, companies in the U.S. have a more difficult time selling their products and services. They become more expensive. And with mega-cap companies, that do significant business overseas, it hurts their bottom line. Earnings and profit margins are impacted which, in turn, negatively effects asset prices. Nike, for example, makes over half their revenue outside the U.S.

The other measure we watch closely is the delta, or change, in the yield curve. Interest rates have a large impact on markets, for good reason. Investors will look to invest in bonds if interest rates become more competitive. More money flowing to fixed income can mean less to equities. But there are risks. If rates continue to move up, then the value of a bond portfolio will decline. Additionally, if the rate of inflation is higher than the bond yield, an investor is losing purchasing power. Over time, equities have provided a positive return over and above the long-run inflation rate. Thus, investors who stay the course maintain purchasing power and continue to grow their portfolio.

Monetary policy is used to manage the overall economy. But it is also used to alter human psychology – to change behavior. There will be a recession on the horizon. There always is at some point. Remember, markets have a way of discounting months ahead. It seems we are in that process now. It’s uncomfortable but that’s how markets work. Changing monetary policy from accommodative to restrictive is never pleasant. Long-term investors who stay disciplined, maybe work around the edges of portfolios, without making big decisions, have done fine.

“Patience is a form of wisdom. It demonstrates that we understand and accept the fact that sometimes things must unfold in their own time.” Jon Kabat-Zinn

Have a great fall. Enjoy this beautiful time of year.


James K. Tonrey, Jr.
Partner/Chief Executive Officer

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