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The Ironwood Recap – Market Update – June14, 2022 

The markets have been pretty unhappy the last three days, giving up all of our runup over the last few weeks.  Remember this sort of downturn has happened around the Fed meetings every time this year.  The big surprise this time was last Friday’s May inflation numbers, with headline inflation coming in at 1% for the month or if you annualize that 12%.  Core inflation excluding food and gasoline was about 0.6% or 7.2% if you annualize it.  Obviously this was not what the market wanted to hear so we’ve had a bad few days.  The fear is that the Fed will not do what they said they would do last time, which is raise rates by 0.5%.  Many people are speculating that they will raise them by 0.75% or even 1% when their meeting ends on Wednesday.  I personally think that isn’t very likely as the Fed normally takes a more measured approach during times that are not a crisis.  While inflation is painful, they meet every 6 weeks, so having a bit more inflation for a further 6 weeks isn’t the end of the world.  They can always be more aggressive next time.  On the flip side, if they overdo the rate hikes, they can cripple the economy and cause layoffs etc, which is something no one wants to see.  Additionally, as they have said at previous meetings, changing the overnight rate is not felt immediately, but over a course of months.  The last rate hike likely wasn’t even fully measured in the May inflation numbers. We will see on Wednesday what they actually do, and we are very close to another buy point, one that didn’t quite show up in mid-May by a few hundred points.  If we hit that in the next few days, we will pick up a few more stocks.  If the market continues to fall, we will pick up more.  At these prices, prices relative to corporate earnings are at a level not seen in a decade or more for many areas of the market.  The forward PE of the S+P 500 is at around 16, and mid caps and small caps are around 12 and 11 respectively.  That’s a pretty low multiple if corporate profits continue as expected.  Revenues, profits and sales continue as expected or even better for most companies.  I would expect once the first indications of inflation coming down show up, we will see the market rebound significantly.  The higher rates that are already priced into the market and the lower net worth of individuals who have lost money in the markets is starting to affect spending habits, which should also help with inflation.

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