As the first quarter comes to a close, not much has changed in the markets from the past year. The US Federal Reserve is still plowing ahead with a string of interest rate increases, the likes of which investors have not seen in many decades heavily affecting profit. Inflation is ever-present and not going back to 2% anytime soon, although the Fed claims this is the long-term goal. What is long-term anymore???

Although the rate of change in inflation has moderated, it’s by no means at a comfortable level for most people. We are all paying more at the grocery store, at the gas pump, and last I checked my electricity bill wasn’t getting better (for all of you EV advocates out there). 

Upon a recent ski trip to the mountains local to Denver, the hotel prices were reminiscent of a busy holiday, not an average weekend in March. Can you blame these businesses, though, when all of their costs are up and they can’t find workers? More than a few of you, in our discussions about your portfolios and the markets, have asked, “Where have all of these workers gone?” That’s a very valid question to me. It seems they have all found some other kind of work, at least that is the theory.

Back to Normal (Profit)?

Ultimately, we believe the world is normalizing and some of these inflationary pressures will eventually ease. We have maintained this stance for the better part of a year and see signs of it everywhere. The Free-Money-Fed days are gone, at least for now, and our world can get back to a place where market forces are more important than 12 people sitting around a table and deciding how much to manipulate the markets. Fiddle with Mother Nature too much, as we have seen, and the end result is some really bad consequences (inflation, wealth gap increasing, deficits, to name a few) especially in regards to profit.

When you put the heavy hand of government on top of a capitalist economy like ours for more than two decades, the mess they created doesn’t solve in one year. This process of getting the Fed out of the way will take time, and it probably won’t be without many victims. Our goal right now is very clearly to ensure you are not one of them. 

Day of Reckoning

Take the most recent example this week of the demise of an incredibly important and storied financial institution, Silicon Valley Bank. To some degree, they were playing the game before them, as manufactured by the Fed. Then all of a sudden, Federal Reserve Chairman Jerome Powell & Co. changed the game, i.e. raising rates – not lowering – and fighting inflation vs. the threat of deflation. SVB took it too far, clearly, and paid a very heavy price profit wise. 

As of this writing, a financial contagion hasn’t happened, yet we are by no means safe from this development. Fear is an incredibly powerful driver of decision-making for humans, and we can never be complacent about the depths of despair investors might feel when the thought of losing all of their money is a perceived reality. This situation bears watching very closely, in our view.

Markets & Strategy Update

Although Friday was not a great day for our Alternative funds, they have navigated through the turmoil of 2023 very well so far. We continue to like them as a way to truly diversify our portfolios and give us a chance to succeed even if bonds and stocks fail again this year as they did in 2022. Gold is coming to life, too. This looks like a safety play against the contagion idea, so it will be interesting to see if precious metals maintain their strength when and if the threat of more banking issues subsides.

We get asked often about our view for the year or the next X months. My typical response to that question centers around the idea of not getting too far ahead of ourselves, and truly trying to get the next big move in the markets right for you. I see our strategy as one of trying to react appropriately to the market situations as they arise, rather than getting fancy and making a mistake because we acted too soon. I’d much rather be sure of a move, than make adjustments to your portfolio that ends in an error. So we probably won’t be first to move at the exact top or bottom of the markets, but rather, we want to catch the meat-of-the-move, so to speak.

Currently, the markets are in a downtrend after getting a proverbial ‘January Effect’ bounce following a bad 2022 for profit. Now, however, reality has set in that the Fed is going to use its less-than-ideal blunt tool of raising interest rates to fight inflation. Corporate earnings are getting squeezed, and we still have a lot of excesses to work off from those trillions of dollars that the Fed sprinkled over the economy like fairy dust. So, for now we remain in a defense position, less stocks and more protective measures. My crystal ball would indicate we probably get an opportunity to bargain hunt the risk side of things (stocks) sometime during summer, but that is not our call today. We are in protection mode until further notice.

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