Quotidian Investments Monthly Commentary – June 2022
Yet again, there was a continuation of incredible volatility throughout the month of June and investment performance fluctuated dramatically as a consequence (mostly on a positive note in the early part of June and which took us up by 6% at one stage in the month) only to end on another downbeat tone. Indeed, the last week of the month was relentlessly negative and we saw a steep decline again in just the final four days. The speed, size and similarity of these rapid intra-day movements is evidence enough of false pricing and of markets that are motivated by short-term fear, greed and guesswork rather than economics.The US Federal Reserve meeting in mid-June had been expected to deliver a further 0.50% increase in interest rates (and, indeed, Jerome Powell had already announced during its May meeting that that would be the case). In the event, however, he moved to an increase of 0.75% which was an unwelcome piece of news to digest. It was interesting to note that Powell had been called to a meeting with Joe Biden in advance of the Fed’s June interest rate statement and after that rendezvous Biden made a point of stating that the Federal Reserve was entirely independent from political interference. Why would he choose to say that other than to try to disguise such interference? Our cynical view suggests that Biden ‘doth protest too much’ in trying to cover his tracks. There is no doubt or argument that inflation has to be reined back and brought under control and that tightening monetary policy (by increasing interest rates) is the tried and trusted method to achieve that end. But doing too much too soon (thus inhibiting the amount of discretionary income left in the consumer’s pocket and, as a result, stifling demand) risks tipping the US economy into recession. The left-wing faction of the Federal Reserve Committee (perhaps with a little behind the scenes help from the incompetent Biden) seems now to have prevailed in their aim to rush through higher interest rate increases more quickly. In their one-eyed attempts to over-ride Jerome Powell’s less aggressive longer-term plan to bring inflation under control more gently, they might have made it a tad more challenging to achieve a soft landing for the US economy and thus avoid a recession. Equity market-makers, of course, have wasted no time in taking a negative view and this recession risk is now being priced in. Following the Federal Reserve’s surprising move on US interest rates in its June meeting Jerome Powell made an additional public statement on 17th June. Perhaps in an attempt to restore his authority, perhaps with a view to taking back control (where have I heard that phrase before) or perhaps simply to reassert who is de facto in charge of US monetary policy, JP confirmed that his commitment to restoring price stability was ‘unconditional’ and that he was prepared to “use all the Federal Reserve’s financial tools in order to “affect demand”. US prices (as measured by the Consumer Prices Index (the CPI) were up by 8.6% in May compared with 8.3% in April. In our opinion that relatively modest increase does not justify the extraordinary ‘red pen’ attacks that continued to be visited upon US equity prices throughout June. Mr Powell has proved himself to be both competent and trustworthy and we interpret his statement to mean that he will pursue a growth agenda for the US economy. This would be good news for investors. On 30th June 2022 the FTSE100 index closed the month at 7,169.28 (a fall of -5.76% in the month of June itself) and it therefore now stands at -2.92% for the 2022 calendar year to date. By comparison, the Quotidian Fund’s valuation on the 30th June shows a fall of -15.99% for the month and it follows that the Fund’s year to date performance figure closed June at minus 42.14%. Of course, we appreciate that on the face of it these numbers look horrible but it is worth emphasising the fact that we have been in this same trading range for the past three months now and it is just an unpleasant coincidence that valuation day fell on a particularly low day in the markets. We should also add that this has been the worst six-month period in US stock markets since 1970; it has always recovered in the past and it will continue to fully recover and then go higher again in the future. Markets are currently being priced on fear and greed not on economic reality. As an illustration of that assertion you might recall that the US markets dropped very nearly 40% in the last quarter of 2018 but recovered and gave us a hugely positive year in 2019. No doubt over the next few months you’ll hear and read a great deal about recession in the UK, in the USA and globally. Much of it will be deliberately intended to induce fear. Let us set the record straight in advance of any misleading narrative on that subject too. There is no official definition of what constitutes an economic recession but the most commonly accepted description is that ‘a recession is a period of two consecutive quarters of decline in quarterly Gross Domestic Product (GDP)’. Essentially a recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between trough and peak, the economy is in an expansion and expansion is actually the normal state of the economy. A recession is therefore a significant decline in economic activity spread across the economy, normally lasting no more than a few months. They are visible and measurable in data readily available for real GDP, real income, employment, industrial production, and retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. The essential point to note here is that recessions are regular but infrequent, brief and short-lived, typically lasting for no longer than a month or two. They are not the end of the world and nothing to be fearful of. Indeed, the likelihood of recession in the world’s major economies has largely been priced in to equity markets in the turmoil of the past six months.