Lorraine’s September Update

October 14, 2022

Hello friends,

September and early October have been filled with cooler weather here in the Midwest and our house has witnessed the quietest September on record.  Just a few short years ago, September was filled with swim meets and hockey games and was always one of our busiest times of year.  With just marching band performances to fill the odd Friday night, life is a lot less hectic.  Grace and Liam are both enjoying college life while also working hard in their classes (or so I am being told) and Mick is well into his junior year at York.  Kelly and Stephen took a quick trip to attend a Pearl Jam concert in St Louis this month, and were able to see a Cardinals game while they were in town.  They had hopes of seeing Pujols hit his 700^th career home run (spoiler alert: it didn’t happen until 5 days later), but were happy to settle for beautiful weather and the fun of visiting Busch Stadium.

1. The market has also cooled, with September posting one of the worst returns on the S&P in 20 years.  Inflation, however, remains hot and continues to be a major issue with September’s CPI rolling in at 8.2%.  These numbers do not give the market hope that the Fed will pivot away from its aggressive tightening and a November rate hike of 75bps is in the cards.  We believe the Fed will continue to raise rates as long as inflation stays this sticky.  With oil prices back up, rents on the rise and a tight labor market, there is little hope of a change any time soon.
2. Speaking of the labor market, September’s jobs report showed unemployment falling back to 3.5%, coupled with a disappointing drop in the participation rate.  Wages continue to edge higher and as I have mentioned many times we are watching these metrics closely for signs of recessionary pressures – we are yet to see them.  We do want to note, however, that layoffs in the technology sector have started, but not enough to move the needle on the overall picture – yet.
3. We are still officially growing as an economy (GDP tracking around 3% for the third quarter) so we are not yet in recession.  We continue to believe that the Fed’s fight against inflation will ultimately lead to recession – most likely in 2023. 
4. With a month left until the mid-terms, we expect the political rhetoric to take over the airwaves.  The market implications of the Republicans taking the Senate are not all that different, as long as they also take back control of the House in November, which despite an improving environment for Democrats, is still the base case.  Expect gridlock, less fiscal support, more oversight, more China hawkishness, and more policy volatility if Republicans win back at least the House, if not both the House and the Senate.    
5. During our reviews with many of you over the last few months we have spoken at length about the need for quality, resilience and consistency in our approach to portfolio management.  We are using weakness to buy and rebalance, while focusing on strong balance sheets in equity markets and higher yields in bond markets.  Our own Jonathan Harper wrote a wonderful piece (available here) I would like to share with you all directly.  He does a fantastic job outlining the build-up to the current environment and what to focus on moving forward.  Please take some time to read his thoughts – but do not ever tell him I complimented his work – he is only 28 and needs to know his place.

As many of you know, I am an avid reader.  I wanted to share with you a book that had a big impact on me recently: 

The Book of Joy:  Lasting Happiness in a Changing World by The Dalai Lama, Archbishop Desmon Tutu with Douglas Abrams

This is a ‘must read’.  These men talk candidly about the obstacles to Joy (Fear, Grief, Anger) and then offer eight pillars of joy which provide the foundation for lasting happiness.  They include personal stories, wisdom and science in their discussion and I came away from the book with a sense of calm and peace….and for a “Type A” control freak like me, that is saying something!  I highly recommend this book- especially in times like these.

Until next time,

L