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Market Review: The capital markets faced an onslaught of challenging news events in the first quarter that included surging inflation data, the Russian invasion of Ukraine, and most recently, the COVID-related shutdowns in China portending continued supply chain dislocations. Perhaps most significantly for the markets, the Federal Reserve finally signaled a focus on combating inflation that will lead to an aggressive tightening of its monetary policy. In late February, both the Nasdaq and Russell 2000 Small Cap Index traded more than 20% below their November highs, while several weeks later the S&P 500, still sheltered by the heavyweights of Apple and Microsoft, fell 12% below its early 2022 peak. The equity market rallied from there to temper losses by quarter-end.

The Standard and Poor’s 500 Stock Index fell 4.6%, the Nasdaq composite dropped 8.9%, the Russell 2000 Small Cap Index slid 7.5%, and overseas the MSCI World ex-US International Index declined 5.4%. The U.S. Energy Sector rose a record 38% in the quarter, but Utilities were the only other sector to post a positive return. The bond market quickly priced in an aggressive Federal Reserve tightening cycle, with rates rising sharply across the curve. The U.S. bond market suffered its worst quarterly performance since 1980 with the Bloomberg Bond Aggregate Index dropping 5.9%. With both equities and bonds moving downward in sync, it was a historically bad quarter for traditional balanced portfolios. Precious metals and commodities were the port in the storm. Gold returned 5.7%, the Gold Miners Index rose 19.7%, and the Bloomberg Commodity Index leaped 25.6%.

The Federal Reserve is Behind the Curve: A “neutral” Federal Funds rate should typically approximate the long-term rate of inflation. The just-released core CPI reading for March hit an annualized rate of 6.8% while the Federal Funds target sits at 0.25% – 0.50%. After a 0.25% hike in March, the market is anticipating 50-basis point increases in both May and June on the way to 2.5% by year-end. Perhaps more significantly, the Fed will immediately shrink its balance sheet by $95 billion each month, while as recently as the fourth quarter, they were expanding it by $120 billion per month. Inflation is expected to moderate from current levels, but the longer term and crucial questions are how aggressive the Fed will need to be and will their policy lead to significant capital markets dislocations or an economic

Investing: With our positioning towards high-quality U.S. stocks, low-interest rate sensitivity in fixed income allocations, and inflation hedging alternatives, we have not been out of step with this environment. Importantly, every adjustment we make in your portfolio reflects your unique profile and investment time horizon. We fully expect continued equity market volatility. Acknowledging that the growth of the U.S. stock market coincided with the massive expansion of the Fed’s balance sheet, it would be naïve to believe a draining of this liquidity will pass uneventfully. Volatility creates opportunities and we still see several companies offering compelling value based on their fundamentals and share price. One example is Fiserv, a financial services company combining traditional payments processing with new “fintech” initiatives offering growth. We initiated the position at a share price 25% below its 2021 high. Focusing on companies and asset values mutes the impact of market swings, in our opinion. Currently, the economy remains on solid footing with very strong labor and housing markets, continued pent-up demand post-COVID, and still solid corporate earnings growth.

In our year-end commentary, we stated that “Bonds continue to be largely un-investable at this point, though over the next two years cash and short-term bonds should begin to offer more attractive yields”. As a result of the recent carnage, bonds may become investable more quickly than we anticipated. From the beginning of March until April 8th, the Ten-Year Treasury exploded higher by a full 1% to 2.74%, producing a 9% collapse in price. With the Ten-Year yield now almost doubling the 1.4% dividend yield of the S&P 500 Index, it will be interesting to see at what point bonds offer legitimate competition to equities for investors’ money. In the meantime, our positions in cash and money market funds in lieu of bond duration offer both stability and the optionality of deploying the funds at better entry points in the future. We thank you for your trust in our team and we welcome a detailed discussion of your portfolio.