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2022 Second Quarter Capital Market Outlook

Henry+Horne Wealth Management President Michael Carlin discusses the current capital market environment. So far this year both stocks and bonds are struggling as the Federal Reserve starts to pull accommodations away. He goes over the data and historical trends to create a thoughtful understanding of where we may be headed.

Good morning, everyone. It’s 11:00 this morning here in sunny Phoenix, Arizona. And we’re going to go ahead and get started with our second quarter capital market outlook. There is, as always, a tremendous amount of data that we have to get through. And before I go ahead and start opening up the charts and graphs, I did want to spend a few minutes talking a little bit about where we are and where we are.

Even as of this morning, Friday was a notable day in the market where the Dow sold off about 1000 points and it was indiscriminate selling. So, what we do as advisors is we’re scouring the data to see if there’s anything that’s broken down materially with the investments that we own to determine whether or not this indiscriminate selling is a reflection of something changing economically or fundamentally that gives us cause for pause. How do we reevaluate? And what we see is we see some profit taking and a lot of the things that we own that did well. So, we saw those some of those things move down as people were in investors and institutions where we’re looking to sell and lock in some gains and really start to prepare for what may be a more difficult and by that I mean more volatile market moving ahead.

And that’s really the fulcrum of what we’re dealing with right now is increased volatility. And we’re dealing with this increased volatility largely due to the fact that inflation is running hot. As you’ll see a lot of the data, inflation is running hotter than it has in more than four decades. And when you couple that hot inflation with uncertainty about what the Fed is going to do, that is creating this consternation. So again, to really accurately predict what exactly is going to happen, you would need to do two things perfectly.

You would need to do one, you need to get into the head of Chairman Powell’s brain. You need to get in there and find out what he is going to react to as he’s seeking to increase interest rates and how far he may take it. The second thing you need to go into the head of Vladimir Putin because what you’re really trying to figure out is how far is this conflict going to go because of all the other spillover, economic impacts that come with confrontation in Ukraine. That brings me to my final point before I get the slides open. And that is in no way today or in the past or going forward are we seeking to make political statements right from an investment perspective.

We react to political outcomes. We may have our own personal preferences and inclinations, but when we’re putting data and information out and then this market outlook very much the same. This is not we are not saying we’re pro Biden or pro GOP or any of those other things. What we are pro is growing your capital so we’re going to focus on that and continue to do that. Irrespective of who’s in office and irrespective of what the data says.

We’re going to read, react, interpret, and make things going forward the best we can for each of you in your portfolios. Chelsea is here in the background. So, Hi, Chelsea. She is going to be able to collect questions and things like that. So, if you have them, send them her way.

As I’m going through the slide deck, I also want to thank a number of you who let me know over the weekend that you wouldn’t be able to dial in live. You’re listening to me recorded. And I do have your questions here as well. So I got a bunch of questions there. If you’ve got more, send them my way.

If you want the slide deck, let me know. Long preamble. Let’s go ahead and dive into the slide deck here. I’m going to go ahead and share my screen. So, I’m going to go through a couple of different iterations.

But let’s take a look at where we are in the first quarter. If you take a look at where we are, it was certainly challenging where quarter to date, small cap down eight and international small cap and US small cap down seven and a half. And you start to look where there was real pockets of difficulty. And you look at the year over year numbers for some perspective. There were a couple of areas that were performing well year over year.

When I look at it a little bit more specifically, and this is the most recent forget quarter today. I thought this was more important to put it through April, where we are for last week and where we are year to date. Even a 60 40 stock to bond portfolio is down 10%, whether it’s global or US based. And you’re looking across the spectrum of different areas to invest in in the US marketplace. And through Friday of last week, there really wasn’t a safe place to hide.

And then normally, if the stock market is having a tough time, you’d put your money in fixed income bonds to find safety and stability. But what you’re finding there is that even in the bond market, particularly in international bonds, you’re seeing an extremely difficult environment there as well. Where was their safety? Well, we found it in commodity futures, in energy and in gold, these three areas. And by the way, those are three of our four largest areas that we’re investing client assets in.

So, Yay, unfortunately, we couldn’t. And we can’t take all of our client portfolio assets and dump all of them into the things that we like best. We do have elements of diversity, but we’re proud of this. We’re proud of the amount of cash that we have on hand, which is in terms of the way that we’ve been managing assets and the way that I’ve been managing assets for almost 27 years, more cash on hand than I’ve ever had going into this downturn. And we’ve continued to avoid things like really like digital assets are things that we have not gone fully into.

And we’ll look to explore again when we find that there’s a right opportunity to dive in. But as you look, this is truly a place where there’s no great safe place to hide. We’re going to talk about great. Now that that information is known, what are we going to do and how are we going to evolve our portfolios to reflect where we should be? And it’s largely reflected here.

Where we’re going to be underweight is we’re going to continue to be underweight in most kinds of equities stocks of all size, particularly on the fixed income side. We’re going to be careful and cautious. Other than lending loans, private credit, you’ve seen many of you have seen us start to allocate capital in those parts of the market. We do feel like there is opportunity to be made and profits to be made in that sector, whether it be new loans being made or floating rate loans that go up in return as interest rates rise. So, we’re participating there.

We still think that Midstream energy has value in gold. So you’ll see us again in these areas continuing to allocate assets, but for now, we’re going to continue to be underweight equity. This is a chart that needs to get updated, and it will be soon as soon as the numbers come out. But what’s expected from the first quarter of this year, 2022 is GDP growth of 1%. Now, that is a huge departure from what many were expecting to be.

Yes, a slow down in GDP. And mind you, we’ve looked at this chart even last quarter. We’re expecting a slow down in GDP, but it’s coming in still quite a bit slower than expected. And you ask why it’s really no more difficult than the Fed actions are coming in steeper than expected. If you remember back just a couple of months ago, we’re expecting the Fed to do six interest rate increases.

We’re expecting that to be a gradual pace. And what we have seen is that your pace is highly elevated. We’ll get much more into what that’s going to look like. And we’re also dealing with the Ukraine and Russia conflict, which the market wasn’t expecting. It was aware that it was going to happen, but really up until even the day before it did happen, it didn’t take much until once missile started flying that the market started to react.

Those two things in tandem have a way of impacting US GDP, and we saw inflation rise significantly as well. So we’re going to wait to see how these numbers come in. But we are aware of the fact that GDP estimates for the United States do appear to be softer, and whether it be CPI, the Consumer Price Index, or the PCE which is, again, the producer, which is really what the Fed tends to look at. These are super elevated numbers, so much so that they have been inflation hasn’t been this hot since about 41 years ago, since 1981. And if you look at the inflation issue, it’s not just here in the United States.

It’s a worldwide issue. It’s essentially what this chart is letting you know. This is not just something unique here to the United States. We’re all dealing with it.

When you’re trying to contemplate the impact of inflation, what you need to be aware of is that certain parts of the consumer price market have skyrocketed for a long time. It was the used car market which has started to show improved signs, where used car prices are starting to relax a bit, certainly not where they were at historically high levels. But I have here the food price index. If you can see just the dramatic increase in surge and what’s happened to food prices here in the United States, this has been hugely impactful to quality of life, and you double that with commodity prices. And what you’re really talking about is the price of oil, the price of gas.

So if you’re hitting people at the pump and you’re hitting them with food, that is where the economic impact of high inflation really starts to take its toll. For a while, what we were seeing is we are seeing people’s wages, average hourly earnings continuing to increase at a pace that was similar to inflation, which, by the way, man, higher wages just was able to maintain people’s quality of living. Well, we’re starting to see some of that unwind. You’re starting to see some of that unwind. Also, with rent prices reaching levels that we’ve never seen.

And for those of you that are tuned in, you’re aware that your residential real estate prices are about as high as they’ve ever been as well. So, you’re seeing inflation in a lot of different pockets reaching astronomically high levels wages and have not been able to keep up. The question starts to become is where will inflation lead? And I’m happy to tell you that our belief is that inflation, especially when you look at the year over year comparable numbers, particularly as the year goes on, you should see just by virtue of where inflation was compared to where it will be in the twelve-month time, moving forward, those numbers naturally start to come down. We think that there’s a possibility that the Fed will be accepting of inflation that runs at four and a half percent or 5%, and maybe that means that they end up doing a little bit less.

And if they do less, that’s particularly a potentially very favorable sign that we’re watching out for. We’ll provide you a little bit more data and information on what that looks like. Yeah. This is again, inflation taking off where the earnings did not match. You saw earnings went up with transfer payments and this is all the coveted support.

So, wages have in Yellow, largely, it’s going to look at the trend have improved, but have not kept up with inflation, particularly lately.

Positively, households are in good shape. So, what you don’t ever want to do as an investor is you don’t want to fight the Fed and you don’t want to fight the US consumer. And by fighting the US consumer, it means if the US consumer is going to continue and be able to spend the way that the US consumer typically does historically spend, that’s usually a really good sign for economic growth. The US consumer continues to make up anywhere from two thirds to 70% of our total economic output. And the consumer balance sheet is strong.

Their ability to service their level of debt has been great. We need to watch to see, as interest rates creep up, how this continues to evolve. So far, so good. And yes, we have seen an uptick in credit card activity here, revolving credit not on path for where it was prepandemic, but we are seeing that change and anecdotally we know that bank of America, JPMorgan, City Group, they’ve all said the same thing in that their average depositors cash balance is two, three or four times as much as it was prepandemic. Which is to say, we know that consumers have a bunch of cash on their balance sheets.

So, when you look at these three factors together, consumer spending continues to have enough really the ability to sustain itself. Whether or not consumers will be confident to spend is something we’ve got to talk about now. We’re seeing inflation expectations rise from consumers. We’re looking at these implied inflation numbers that are surging. But here’s where I want to kind of highlight.

Rare. Is it that consumer confidence is this low? How rare? Well, it was this low when we had the COVID, when we went through the Covet cycle, where the economic environment completely shut down. Our consumer confidence is at the same, if not lower, level than it was today than it was really in that March, April of 2020.

You hadn’t seen this level since the.com bubble burst or the super high inflation days of the 70s. So, we need to unpack this.

One of the things to consider is that if you’re looking for signs of capitulation, you would look at this as a contrarian and say, wow, well, it isn’t going to get much worse than it is now. And this little uptick here, you can kind of see it if you Zoom in or if you get really close to your screen or your phone, you can see it this little uptick here. Everyone’s waiting for that sign about when we’ll hit the kind of the absolute bottom of consumer confidence. And if we’re at the bottom of consumer confidence, then many would argue there’s only one direction to go from here and that is eventually up and you’ve got that strong consumer balance sheet and potential for strong consumer spending. So, if you’re looking for a silver lining and if you’re looking for where we can get the fuel for the market, this is a big component of it.

It doesn’t necessarily tell you where we need to be investing, but it gives you a hint that there are parts of the market that will do well.

I do want to switch gears and talk a bit about interest rates. Interest rates are critically important to understanding and unlocking the mystery of where we’re going to go economically. And goodness, the two-year treasury has gone straight up. It’s gone parabolic. This is not new.

This has happened in the 70s, in the 80s, the 90s, 2000s, if you follow my cursor here again, all the way up to 2018, that in September when they started to mess with things a little bit more to the Fed and until now. So, what’s interesting is that the two-year treasury gives you a really clear path and understanding from a historical context what the Fed is going to do, increasing interest rates. So right now, if you’re looking at the two-year treasury, which is somewhere around two and a half as of this morning, that gives you an indication of where the market believes the Fed is going to stop increasing interest rates here’s. The important thing to note is that if you’re looking decade after decade after decade after decade, what does this trend tell you? It tells you that the Fed has sequentially been less able to increase interest rates back to where they were, which would lead us to believe that they would run into the same challenge here, which would then lead us to believe if this multi decade data set holds true, that the bulk of the increases to where we’re seeing interest rates should be done for the most part.

So, we are more inclined now to start to redeploy money in extended duration fixed income, where we’ve been far shorter duration so far. And thank goodness, by the way, because with the bond market broad, US AG bond market down over 9% for the year, most of our bond portfolios are down less than half of that. It’s because we were super short term in duration. So, we may look to extend our duration here a bit because this is a sign and signal that we may be topping out. So, continue to watch that to your treasury.

The impact that rising interest rates has also had has also been on the mortgage market. There is rising interest rates in the secondary component. Is the Fed buying or not buying mortgage-backed securities? Look at the increase to the 30-year mortgage. This is really just in a couple of months.

If you’re trying to wonder from a historical context how rare is this kind of an increase, that increase is so rare. It’s one of one. It’s never happened before in that magnitude. So, with our mortgage rates topping out at around 5% again, you’d have to argue that that’s going to have impact on the housing market. It’s going to have to have an impact on economic spending.

Just this past weekend, I had two different clients email me and say, should I take out a HELOC? And when they sent me their HELOC, details at the home equity line of credit against their house was amazing. I’m seeing HELOC rates that are six and a half, seven. I’m seeing huge rates where that was previously unthinkable, really just even a few months ago. So, I would suspect there’s going to be less people taking on home equity lines of credit, even though that they have a bunch of equity already built in in their homes.

I would expect this to end up impacting the price of homes. This meaning the increase in the 30-year mortgage. And we’re looking at it. So yeah, you’ve seen a little bit of a dip here in the cash dealer home price index still highly elevated, and I’ve got a little bit more on that. But this chart was great.

And then trying to explain it proved to be difficult. So, what I’ll show you is this. There’s a lot of great data on this chart. I know that there are squiggles. I realize that that’s not ideal, but let’s focus on this because essentially this is the data.

And when is the data proof? It proves that this cycle continues. Right now we’re in this mortgage rates rise until affordability becomes an issue, meaning there will be a rush to the exit at some point for people to quickly try to sell their homes or have that real estate transaction activity. And mortgage rates continue to rise until kind of affordability hits crescendo. I wonder if we’re getting there much faster than expected.

We’re going to see because the next phase of the cycle is prices decline relative to incomes. We haven’t seen that yet. Then mortgage rates eventually fall as if home affordability approves, and then prices ends up rising and rising relative to incomes and then affordability declines. This is the cycle. This is the data that proves this is the housing cycle.

I could just tell you where we are right now. I can tell you that home prices are certainly very high and elevated. We haven’t seen the decline yet. I’m constantly throughout, every single month, every single quarter, every year. People are asking now should it be the time I’m looking for my second property?

Should now be the time where I’m making a move with my primary real estate? I can just tell you from a pricing perspective, if you’re looking to buy at a discount, you should probably wait again, the data indicates that your opportunity is forthcoming. And if you are looking to make a move to potentially try to sell high, this is certainly the opportunity may be the final opportunity to make that happen in a meaningful fashion. We got more charts in time. There is the expectation that we’re going to have now a total of eleven interest rate increases.

This is just through the end of the year. I don’t know, and I don’t suspect that this is going to happen. I don’t know if we’re going to be getting this 50s. And now there’s discussion of 75 basis point increases with the Fed. It’s likely that we’re going to get at least one or 250s coming up.

The Fed is signaling that they are going to end up increasing interest rates to that magnitude. And I can just tell you from my career’s perspective, when the Fed tells you they’re going to do something, they normally do it. So, when Powell starts talking about 50, as he was last week, I think that’s going to happen. We just need to plan accordingly. We’re seeing the TSA numbers look better.

We haven’t seen people come back to the offices yet, and that’s in the big major market. So, some of the COVID trends continue. It isn’t a surprise to see that as oil prices rise, Biden’s approval ratings fall. This is, by the way, a common linkage that you can find between energy prices rising in presidential approval ratings. This may have a lot of other factors to do with it, but point is that we’re seeing crude oil prices go sky high, not gas prices go with it.

And people are paying a significant amount more for energy consumption because we’re in an election year, we’re going to be watching all the election cycles very carefully and closely. What we’re looking for and what we’re expecting right now is this data to be because there are some areas where there’s a tossup in Arizona being one of those States that is a tossup, but where we feel like and this is just the data and the polling data as it comes in, it looks like and it appears to be that Senate control will fall in Republican hands in November. And what that would mean is that with Biden in the White House and a red Senate, what that means is that we aren’t likely to see any tax increases. We aren’t likely to see a whole lot of movement. What that also means that we might not see unless there’s anything that’s dramatic, any projected stimulus either.

So we may see a whole lot of nothing, which the market tends to like in certain instances if November comes through the way we think that it might with earnings, we are anticipating massive earnings. And if you look at the earnings results just so far from this quarter, another phenomenal earnings beat versus earnings estimates cycle, which is great, the market is not responding. What you have is you’ve got the valuation for the S&P 500. The valuation multiples are contracting, which means is that the market is giving you less reward for earnings. So even though earnings are increasing, the reward is shrinking.

What you’re seeing as a result of kind of this market performance here. But corporate earnings are expected to be great. They’re expected to be great. Year on year. The markets continue to expect a 9% earnings growth rate for 2022.

We’ll let you know if that changes. But the market is not prepared to reward with a higher multiple. And that’s common in environments where you have rising interest rates and it’s common in environments where you have this kind of economic uncertainty. So, we’re watching it. We are preparing for it.

So, the way that you can avoid it is by avoiding some of those high multiple areas, which tends to be growth. And if you’re talking about growth, you’re really talking about technology. And technology for so long has been something that’s been marvelous. I got these two cycles circled here in red. This is the.com bubble bursting in 2000, and this is this most recent cycle where we had this measure, by the way, growth stocks versus more traditional, dividend paying, garden variety steadfast companies on the value side.

So, growth outperforms so much more than value. We saw it capping out last year. There was a sharp recovery, and we’re seeing value start to perform better. One would wonder if this is kind of the double top that we saw in the.com bubble bursting. And then you had a very long cycle where value performed better than growth.

You would look and notice in your portfolio, we’ve had a lot less growth this year. We expect that approach where we’re going to seek to take on less growth than we normally would or we have been to continue because it looks like this trend is something that’s got some legs to it and that you’d be thinking that the market environments calling for more value based, dividend based, solid cash flow, big balance sheet type of companies rather than your traditional growth, which we’ve come to love for so many years, we’re seeing the price to earnings numbers. We talked about this a little bit starting to come down, IPO withdrawals. What I would say here is this is a good sign because I want to be a contrarian when you’re seeing the number of IPO filings drop and IPO withdrawals increase. If you’re looking for these kind of points of capitulation, this is another sign where you’d rather invest here than say here where there’s a surge of new IPOs.

Is there’s a real flight to try to get your company listed in public before the market quickly turns? So, this is a good sign. So I’m okay with that. You saw a similar kind of thing before the financial crisis where there’s an elevation in withdrawals. We’ve seen this elevation here.

I would suspect for this to continue for some time. And when you’re looking at and examining what the Fed is doing and how it’s reacting to all this economic data. What I will tell you is this is that it depends upon the speed with which that the Fed increases interest rates to determine whether or not it’s going to be problematic for our economy. What I’m saying is this. The last couple of cycles, the Fed increased interest rates slowly, 94, 99, four, 2016 slow, slow, slow.

The market was able to largely do pretty well as the Fed was increasing interest rates similar here again. And this is back to the 50s. When the Fed was increasing interest rates slowly, the market was able to perform. So, where it becomes a little bit more difficult is when the Fed moves quickly. And I can assure you that the Fed is moving quickly today.

How? Well, because the Fed is telling you that they’re moving quickly, they’re talking about 50 basis point increases. The market is thinking about 70. These are huge numbers that are likely going to happen in a quick time. And when you look at the data here’s, what it shows is that if you’ve got an average slow cycle, the market return on average is 7%, which is pretty good, which is pretty good.

As the Fed slowly tries to move the economy gently lower in a very gradual, methodical fashion, lots of announcements, no surprises, all that’s great. But the average fast cycle, which we’re in right now, is usually slightly negative, slightly negative. Yes, there have been other economic cycles where we had high inflation, where the market was very negative. But all in all, we’re prepared for the market to struggle to perform, which is what we’re witnessing right now in the stock market performance. And we’re navigating around it because even though the S&P 500 may be down, that doesn’t necessarily mean there aren’t safe places to invest.

And we’re evaluating them. And whether it be, again, our gold, our energy inflation beneficiaries, those types of holdings we are looking to and seeking to capitalize on those parts of the market that work and that will continue to work. We’re going to switch our focus to the bond market. And I mentioned it before, but I’ll mention it again, 2021. Last year, it was the third worst bond market since 1989.

All these Gray lines are other years where this is again. And this is kind of your zero performance line here. So, the bond market typically is positive. You can see the vast majority of instances the bond market is positive. You can see this is the third worst.

But you can see by comparison where our bond market is on balance today, year to date versus other years. And my goodness, it’s difficult. So, we’ll have to wait and see. But the way the numbers are shaping up, it would appear to us that the worst appears to be digested. And we would expect to see this to flatline somewhere around this area until there’s some meaningful change in interest rates.

We’ll continue to be Proactive. There and this is reflective of this negative performance here can be captured here. This is where the yield curve and for Treasuries was the beginning of the year, December 31, 2021, and where it is today. This is a massive move higher from nearly 2% on the 30 to three, from one and a half to 288, nearly a doubling on the ten-year side. You see a slight inversion in the yield curve here, this negative downward slope.

But this is giving you a full indication that what we’re expecting is that the Fed, which is currently down here to be raising rates all the way to this level here, which would give us if everything remained the same, a positive sloping yield curve that’s in a perfect world, but it never works that way.

We’re going to have to watch and wait and see. We’re going to have to watch and wait and see. What I’m pleased to share is that we haven’t seen spreads increase, which would mean that there’s real fear, concern or anxiety in the bond market with defaults haven’t seen it, which is good. This is another way of indicating that, yes, there’s been some change to risk elevation with bonds, but it’s been pretty mild. So, no real great opportunity for us to be buying high risk bonds, which is okay because yields have crept up enough for us to find good values there.

And like I said, here are places in the market once we get a yield curve inversion. Once we do, we have had the yield curve inversion. That event finally did happen within the past 45 days as measured here. And once we get the inversion, it’s encouraging to note that one year later that most parts of the market perform better. So, this is kind of this inclusion is the worst over.

I don’t know if it’s going to be an inversion that looks like the.com or if it’s going to look like it did during the financial crisis. We’ll have to wait and see. But I’m encouraged that once we kind of get that final inversion, that there are going to be places in areas for us to invest in. And speaking of areas for us to invest in here’s the United States right in the middle.

What we’re seeing is that our interest rate increases have not gone alone. And you can just think back to where we were not this past quarter, but just a couple of quarters ago, and all the different market outlooks that I provided where I’ve talked about how negative interest rates were across the world. Look at this. You’re not seeing any red anymore, certainly here in this ten year yes, on the super short-term side in Italy, but goodness, what a difference a couple of months make in places like Germany or Switzerland or Japan, even where you’re seeing positive interest rates on this ten year and other parts of the yield curve. And we’re seeing that the United States has a pretty significant buffer, making us certainly the highest quality debtor out of this group.

And at the same time, there’s a unique ability to earn a heck of a lot more here by investing in our Treasuries versus any of these other developed countries across the world. So, I would expect Japan’s had problems because Japan continues to irrespective of our Federal Reserve here putting brakes on, and the Federal Reserve in Europe doing the same. Japan continues to put their foot on the gas. Our US dollars appreciated meaningfully over the Japanese yen. I wouldn’t expect that to be any different.

We are looking at the ten-year treasury yield very closely. This curve is a mathematical wonder. This is where the ten-year treasury stopped. Goodness. If this chart were to reverse itself, it may mean something much greater.

But for now, we’re going to put our stock in the fact that the four decade plus trend that the ten year treasury has gotten sequentially lower will continue to follow through, which should mean that the ten year treasury is topping out at this level. And we’re saying that because these cheap rates have allowed us to finance our debt and our total debt to GDP, the debt to the size of our economy crescendo here with COVID, this is a straight up spike and we are in a whole new world. So, with this amount of debt, because we’re able to do it cheaply, we’re able to make the numbers work. So, this would indicate to me that the Fed is going to be hard pressed to do too much, or certainly as much as some fear. I have heard experts even say that they’re expecting forget two and a half percent.

They’re calling for the Fed to do three and a half or four. I can’t remember who it was off the top of my head, but somebody was saying that they really needed to match the rate of inflation, they needed to match 8%. There’s a lot of things out there, but conventional wisdom would say that the CPI numbers should subside, especially as I mentioned before, on a comparative basis, we’re seeing our inflation adjusted Fed fund rate start to reverse and you’re likely to see these numbers creep up. But will it reach these crazy crescendos that we saw in the early 80s? It seems unlikely.

So, there’s many that say what about the fact that we’re going to be issuing Treasuries and say, well, that, by the way, is always the case every second quarter? Well, why would the second quarter, why would it be issuing less Treasuries? Because of tax receipts. We know that there’s record amounts of tax revenue that the US government has collected and not uncommon. We’re seeing not a huge amount of issuance, which means that we’re seeing a shrinking of supply wouldn’t be surprised to see yield continue to soften here over the next couple of months.

Energy, energy.

We had this brief pocket of time during COVID where we were producing a lot and consuming next to nothing that’s measured here. This is very uncommon. Then we were producing less than we were consuming. This is a way for us to catch up. So, we’ve caught up.

And the energy forecasts and projections moving forward are that we’re going to have these again, a little bit more, consuming a little bit more, but we’re going to be producing more than we were consuming. That’s the expectation. The IEA’s not always right, so I don’t put too much stock in that. But here’s what I do know. I do know that there is an expectation that oil and gas companies are going to be doing a lot more drilling, especially while oil is at $100 a barrel.

Yes, oil did peak at 120. So why didn’t rig count keep track and I’ve got some rig information coming up. Why didn’t rig keep up? Why weren’t we drilling like crazy as soon as oil hit 120? This tells the tale.

Number one investor pressure to main capital discipline. The energy guys aren’t going to start deploying capital, spending a lot of money doing a lot of drilling until they’re absolutely certain about what policy is going to be long term. And they’re not going to now, nor have they ever reacted super quickly to what the price of energy is. They need to have a greater sense of certainty. So perhaps if the administration puts forth some rules and regulations that make drilling more favorable, we’ll start to see this reverse.

Because what we know is that depending upon where your oil is located in the United States, Permian or shale, wherever that this is the breakeven price here in Black, everyone’s able to make a lot of money exploring, drilling, producing, extracting oil out of the ground at current prices, but just their anxiety about what not just the Biden administration, but what Capital Hill is going to be saying in the years to come. And that uncertainty is making them hold onto cash and capital. So, we know that that needs to change in some way, shape or form for us to get greater certainty. People want to get excited about REITs in real estate. Listen, they’ve been wonderful aspects of our client portfolio, those of our clients that have it.

It’s been wonderful. It’s been great. We’ve had record sales of certain private leads as well. It’s been great. But at the same time, we’re also noticing that yields are as low as they’ve ever been.

And when you’ve got yields this low, that means prices are super high. So, if I’m being a contrarian, this is something that gives us some cause for pause. Because if we end up seeing some type of real meaningful move in interest rates, this is something that we feel has to have an impact on real estate. So, we’re aware we’re cautious and we’re going to continue to be cautious with our real estate holdings. As I mentioned here’s, rig count.

Yes, from COVID. There’s been an improvement, but normally it is as prices go down, rig count drops as prices go up. This is normally kind of the relationship. This is a very wide gap. I haven’t seen anything like it.

And look at not gas look at not gas prices in the rig count. This is barely a whimper of a move compared to what not gas prices are doing. So, saying that we’re looking for more clarity from administration before we’re going to see a more meaningful move with energy drilling. We still believe in the MLPs. Many of you have an investment there.

Yes, we’ve seen a drop in yield, which means price has gone up. But we’re also seeing free cash flow yield here in light blue, really well positioned. We don’t have a pure energy play. We’re using this MLP play. And this is part of the reason why we’re seeing more yield and more free cash flow.

But we are seeing some of these things start to top out a little bit. We’re going to be careful there, gold miner. Many of you have our gold miner position. We’re seeing the same kind of thing where yes, recently past couple of days, we saw some challenges in the free cash flow movement, but we’re seeing general trend improvement with free cash flow and very little debt and indebtedness with great free cash flow yield. So, this is again a net positive two tailwinds that tell a good story about what we see in the goldminers marketplace.

As I mentioned before, the quantitative easing globally. What you’re seeing is that the year over year change for most and on aggregate is that central banks across the world are doing less. If you look to see where the highest growth, most speculative part of the market is, that is known as like the Ark or the Kathy Wood index. And it’s interesting is that the Kathy Wood index for the first time has caught more than caught up to even just the base value index, meaning the super, ultra-high growth, high octane part of the market that was doing so well for so long and really crescendo here in 2021 hasn’t recovered and has gone down to such a degree that the performance is actually well, it’s not as good as the S&P 500. It’s not even as good as the value index.

So it’s come all the way back. We’re going to watch to see if there’s a trend reversion there. And if there is, maybe this is something we could take a nibble on at some point, but certainly not now. We are looking at close end funds. Closed funds are a different investment type where they treat it at a premium or a discount.

I think you guys know me. I like discounts. I love discounts that are two standard deviations. So, anything below this green dotted line, there are pockets. First of all.

If you love two standard deviations, I really love three standard deviations. This is where we’re buying close in funds with two hands. For now, we’re noticing that it’s getting close and maybe after and again, depends upon where this week’s market closes. Maybe we’ll get closer there. But you might see positions and close end funds coming to a portfolio near you sometime soon.

And if you want to get a sense for historical context for just how odd this market has been, is this not the perfect chart? It jumps out at me. Look, 2022. These are all the different years going back to 40 years.

It’s about 40 years or so. These are all different instances where this is the most negative. The stock and bond market has been on a combined basis.

Yes, 2018. For those of you that remember, the US market was down some 6% and you had global bonds that were down maybe one or so. You got global bonds down eight and stock market down. And really right now, you’ve probably got this thing through today, this yellow dot right around here, which all of this is to say, this is a historically rare time. But this is exactly the kind of opportunity that we’re looking for.

You don’t get many of these kind of situations where you can reallocate refocus client portfolios for explosive growth. We’re fortunate to be in one of those such times right now, and we are seeing the expected ten-year return numbers start to improve rather meaningfully as you go forward. The last page is a disclosure page. So, I think I got to most of the questions. I think I did.

Okay. I did answer your question. Okay, good. So, I did answer your question. Excellent.

So, it looks like I answered all the questions, which is nothing short of a miracle. And I got down in under an hour, which is something that I promised that I was going to work to try to do. If you do have more questions about specifically about your portfolio and what we’re doing to allocate reallocate reconfigure, send us an email. Send me an email. Let me know.

We’re happy to dive in. But just so you’re aware that we’re aware of all the different factors at play, there are enough of them to create a potential silver lining that indicates that the Fed may not be able to do as many interest rate increases as they expected. The market may look at that very favorably if and when it does happen. And there’s an increasingly decent case for that to occur. But if the data continues to worsen and if we don’t get the inflation improvement that we were hoping for, meaning if inflation doesn’t start to come down naturally, then we could be in for a difficult ride because the Fed would be forced to do a lot more than expected and we will make moves and anticipate as needed.

And there’s a lot of runway between now and the election in November of 2022. We’ll get you prepared for that? We have a whole other market outlook to contend with before we even get to that point. But that’s it for this quarter’s market outlook. If you have anything you need me to expand on, please let me know.

I thank you for your time and attention. Take care. Have a wonderful day.

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