Trusted, Independent Investment Management

“The triumph can’t be had without the struggle”

–Wilma Glodean Rudolph

Actions taken by the Federal Reserve to curtail inflationary pressures are showing signs of progress. Annualized inflation has dropped to 4% from over 9% in 2022. More rate increases are likely in the coming months as the Fed’s targeted inflation rate is 2%.

Equity investors have cheered the progress as the S&P 500 has risen 15% YTD, and short-term bond yields have increased from near zero two years ago to over 5%. The ten-year treasury yield is 3.8%, indicating that investors think the Fed will succeed in lowering inflation toward the targeted level, and will eventually be able to begin lowering rates once inflation has been tamed. The stock market rally has been led primarily by a few growth technology companies. In fact, 10 companies in the S&P 500 have generated almost all of the gain in the markets with the remaining 490 companies up an average of 1% YTD.

Why has the market advance been so narrow? We believe it is because the economy almost always enters a recession following sustained Fed rate increases. Therefore, money in the market is crowding into high growth technology stocks that should be able to grow from emerging trends like artificial intelligence. The remainder of the stock market is trading with caution, wondering if the next recession is around the corner. At the June meeting the Fed chose to “pause” rate hikes and watch the economic data even though core inflation, which excludes more volatile items like energy and fresh food, is still high at over 5%.

We have positioned client portfolios to weather the uncertain environment. Earlier in the year we trimmed some overweight stock positions, and we sold companies where our confidence in management to achieve targets was low. We reinvested the cash in short-term treasury bonds and money market funds, with the plan to reinvest in new stocks opportunistically. We have added a new position in Anheuser-Busch InBev following the stock’s decline on a controversial ad campaign. We also established a position in Dover, an industrial company that is reshaping itself. We purchased Blackstone, an investment business with a successful track record in alternative investments.

We wouldn’t be surprised if the market advance stalls as investors monitor further Fed actions to drive inflation lower. The US consumer has kept GDP growth positive and the ability of our economy to avoid a recession is firmly on the back of the consumer so we will be monitoring that as well. Ultimately, we think the stock market will struggle to move higher without a broader number of businesses reporting good results and contributing to the overall market advance. Having 10 stocks drive a market just isn’t healthy.

Thank you for entrusting Ayrshire Capital Management LLC with your money. We look forward to speaking with you in the coming weeks.

Sincerely,

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