Second Quarter Commentary

We listen to, read over and over, and see that when interest rates increase, the economy slows down, albeit with a lag. The above graph shows this is frequently true. The lag happens because it takes about 9-months for the rate changes to take full effect in the economy. The Fed started increasing rates in March 2022, quickly followed by predictions of a recession by the end of 2022. The effects of the rate increases started to appear in the fourth quarter last year. The effects have, thus far, ranged from irrelevant to scary, but no recession yet.

The irrelevant nature of the rate increases shows most clearly in the labor markets. The end of the pandemic brought on strong job growth which continued in May with 339,000 jobs added, bringing the 12-month increase to just over 4 million jobs. Conversely, one of the scary effects is the rate increases coupled with poor risk management at select regional banks resulting in four failures in March and April. Historically, rising rates put a crimp in credit creation which leads to an economic slowdown. The higher rates and bank failures have reduced credit demand. Most bank loan categories have been stagnating or declining since December, the 9-month mark from the initial rate increase. One of the exceptions is consumer credit cards, which are up 15% since May 2022. Consumers are adding to their debt burden to increase spending. This is not sustainable and presages a slowdown in consumer spending soon.

Through the turbulence of the past 15-months, the economy and capital markets have been resilient. Job growth is still strong, inflation is falling, U.S. large caps jumped 8.7% in the second quarter and are up 16.9% year-to-date. Bonds did struggle in Q2, falling 0.84% after a strong first quarter. Allen Trust Company did not keep pace with the equity markets in the second quarter, our stocks were up 6% and are up just under 13% in the first half. On the bond side, we did outperform in the second quarter down 0.2% and up about 2% in the first half. The source of the underperformance was legacy holdings such as AbbVie, Estee Lauder, and Amgen, and the recent addition Target. Boosting performance were new additions Zscalar and Crowdstrike, which we expect will add value long term. For the rest of the year, we expect the economy will slow further, equities will not be as strong compared to the first half, but fixed income and equities will benefit from an end to the rate increases in the second half of the year.

Call us at (503) 292-1041 if you would like to discuss further.