Jul 12 2022
July 12, 2022

Second Quarter – 2022

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The first 6 months of 2022 was the worst start of the year for the S&P since 1970.  US stocks are in a bear market.

Every recession in the US has started with a big jump in oil and food prices.  We are probably in a recession.  The Federal Reserve is acting to curtail inflation by raising interest rates.  The impact of those hikes has so far been a big slowdown in the housing market, a reduction in consumer spending and a slowdown in wage increases.  However, the job market remains strong with eleven million jobs remaining to be filled.  There is a worker shortage that will probably continue for the next decade.  For those who were not able to purchase a new home apartment rental rates are up an average 20%.

The FED has stated that interest rates will continue to be hiked until inflation is brought under control.  The problem facing the FED is whether their rate hikes will impact the true reason for inflation.  There is an energy shortage, and it will continue to get worse. 

The Biden administration shows no inclination to stop its effort to force an energy transition on the US economy.  New regulations being proposed would prohibit drilling for oil in the Atlantic and Pacific while limiting drilling in Alaska and the Gulf of Mexico.  There are also efforts to shut down existing oil production in the Permian Basin in Texas. 

The supply chain crisis continues.  China is trying to get back to business following months of shutdown aimed at stopping Covid infections. Just in time for a possible dock workers strike on the US west coast.  The east coast in now facing shipping bottlenecks.  Union strikes across Europe are affecting the movement of goods to those ports.

This commentary has for months been warning of coming food shortages.  Shortages that will lead to famine in some countries.  Couple the food shortages with credit issues coming to a boil all over the globe.  Sri Lanka was the first country to fall.  We will see destabilization spread as populations face economic collapse and dwindling food supplies.

This is an exciting and interesting time to be alive.

The market will remain very choppy.  There is the real possibility that the Federal Reserve’s rate hiking will push the economy into something worse than a short recession.  Coupled with the energy shortage we could be facing stagflation.

So, how does all that impact the Oak Springs portfolio.  We don’t expect the growth/tech stocks to make a comeback while the FED is raising interest rates.  Inflation will have its greatest impact on the small and midcap stocks.  The bond market is a place to avoid while interest rates are going up.  The emerging markets are facing credit issues and problems repaying dollar denominated debt.  Europe is facing inflation from food and energy shortages resulting from the Russian invasion of Ukraine.  Labor issues are also creating problems across the European Union.

Oil and commodity prices dipped at the end of June.  Don’t get comfortable thinking we are about to see dropping gas prices.  Oil and commodity prices will be going higher, and we will continue to be overweight in those positions as well as financials and real estate.

The US market will remain the place to be even while being buffeted by inflation, recession and food and energy shortages.

If you have questions or would like to sit down to discuss the current investing environment, please feel free to contact me a (865) 368-1917.