Dear friends

Last month, top executives from JP Morgan, Wells Fargo, BlackRock and Morgan Stanley again voiced pessimism at an investor conference that factors such as consumer confidence, inflation, the rising cost of capital and unpredictable factors like the war in Ukraine or the ongoing COVID-19 shutdowns in China could cause anything from a “minor to a superstorm.”

With inflation rates above 8% in the U.S. and the Eurozone, market participants gave up hope that the Federal Reserve might back off further rate hikes. In fact, on June 15, the FED raised its key interest rate by another 0.75%, taking its most aggressive step yet to fight inflation. At the press conference that followed, Chairman Jerome Powell indicated that the Fed was “not trying to bring on a recession,” but that there was still “a lot of work to do” to bring inflation down to its 2% target.

Not surprisingly, stock prices plunged and volatility spiked on growing concerns that the Fed might not be able to achieve a soft landing. The transition from the post-pandemic stimulus-fueled recovery to more sustainable growth was clearly difficult, and a recession cannot be ruled out.

The risk of a recession also weighed on crypto markets with a sharp risk sell-off leading to a partial “miner capitulation” as the cost of electricity for crypto mining operations started to exceed revenues.  Many miners had to suspend their mining operations and, on top of that, sell some of their crypto treasuries to cover their operating costs. In this context, Bitcoin briefly fell to a 52-week low of $17,592 on June 18, down nearly 75% from its value last November, dragging most other cryptocurrencies with it.

All in all, the U.S. stock market has had its worst first half since the 1970s. And with stocks, bonds and crypto all down more than 20%, there was almost no place to hide. Even cautious investors in diversified stock and bond portfolios suffered significant losses. 

Again, everything ended in the red: The Nasdaq closed -8.7%, the S&P 500 -8.4%, 20-year bonds -1.5%, gold -1.6% and bitcoin -37.8%.

Our strategies were comparatively steady but also had small declines with Universal -0.4%, Progressive ‑1.4%, and CryptoMax -4.6%.

While the “real” economy remains broadly quite resilient, both the inflation and the Fed’s actions to curb it have had a significant impact on households. With inflation above 8% and 30-year fixed-rate mortgages rising to almost 6%, any remaining savings cushions are now getting further eroded, leaving households much more vulnerable if the economy slides into recession.  

However, if we look back to the oil crisis of the 1970s, the high inflation of the 1980s or the great financial crisis of 2008, when investors were similarly or more pessimistic than today, stock markets consistently posted double-digit gains over the following 12 months. 

So once again, our patience is being tested. As it seems there is no other way but to close our eyes and ride it out, knowing full well that this too shall pass…

Stay happy, healthy and wealthy!

Omar