Happy Independence Day from the team here at Heritage. Hopefully, you will be able to get out and celebrate 247 years of American independence. We often forget that the United States is now the second longest, continuously operating government behind only the Vatican. There are many nations in the world older than the U.S., though their current forms of Government are more recent than ours. It is amazing the vision and foresight the founding fathers had for a country to be ruled by representatives of the people, for the people. Laura and I are planning a trip to Philadelphia in July to visit the original U.S. capital buildings, including Independence Hall. This is where the Declaration of Independence was written, as well as the framework for the U.S constitution. John Adams was inaugurated here as the second President of the United States. This was essentially the first time in history that power was voluntarily, and peacefully, transferred to a non-family member. This is something for us all to celebrate this holiday weekend.
The big economic news this past quarter was the Federal Reserve Board’s decision to stop raising interest rates. As you know, they started raising interest rates back in March 2022 with a small quarter-point increase, by the time they were finished, they had raised interest rates over 5 percent. This is important because it makes the cost of money more expensive and has a slowing effect on the overall economy, and often leads to a recession. The economy appears to be slowing down, though not like one might expect. This normalization process, post the pandemic, has had more staying power than most economists forecasted. Consumers have shifted their focus from buying items online to getting out and doing things. This pent-up demand for travel can be seen in the near-record number of daily fliers here in the U.S. Many of the international carriers was sold out on flights to their more popular destinations.
The reason for the “Fed’s” drastic move with interest rates was of course the huge spike in inflation. On a positive note, inflation has been cut in half from the peak of last summer, and some of the stickier components of inflation are beginning to turn lower. Both housing prices and “rent equivalent” numbers are finally beginning to come down which should have a significant impact on bringing down inflation to a level more suitable to the Fed; many are even forecasting lower interest rates in 2024.
Employment has remained strong throughout this period of increasing rates as companies try and fill positions lost during the pandemic shutdowns; the domestic service sector is still not back to the level of employment it had prior to the pandemic. U.S.-based companies so far, have not let employees go as it has been very difficult to find new people. This again bodes well for future growth as employment continues to increase.
As we work through this “Normalization” process coming out of the pandemic, we may be in for some surprises. The recovery has not looked like periods we have experienced in the past, so it will be even more challenging to forecast how consumers and businesses will react. There may still be bumps in the road to recovery as monetary policy has tightened quite significantly along with the cost of capital. On a positive note, Banks overall are sound, companies have strong balance sheets and are planning for a slow-down, and consumers are still not over-levered.
As goal-focused, long-term investors, the first half of 2023 has been a good lesson in sticking with the plan and not listening to the market prognosticators. While the discussion of recession has led most news stories, the bond and stock markets have been quietly going up this year. One can never consistently “time” what millions of investors will be doing. Will we have a recession? Have we been in a recession as some analysts have touted? We won’t know until we are well through the event, at which time it will be too late to make any changes, so we stick with the plan.
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