As the year nears its halfway point, companies will start disclosing their Q2 earnings. You may remember that investors primarily paid attention to projected future earnings rather than actual earnings last quarter, and I predict that this will continue this quarter. Therefore, even though company earnings exceeded expectations, projections must remain optimistic because downward revisions could result in a drop in the value of the company’s stock. As long as inflation remains, the Fed’s mandate to fight inflation by raising interest rates will continue to be in effect, which will decrease demand. As demand slows, businesses may find themselves in the crosshairs, which will have an impact on profitability and forecasts. Though it may be unsettling, we need the demand to slow in order to stabilize the economy.

When will it happen? It’s difficult to say. However, I do know that, in the long run, I have faith in the American economy. Our economy has experienced many ups and downs over the years, but we have always remained resilient. From the 1973 oil crisis through the early 2000s collapse of the dot com boom. As you can see from the chart below, we have always been able to recover and become better than we were. Because every time is unique, it might be challenging to predict what will happen next in our current situation. But I have faith that we can overcome this.

Did we respond in the most effective way possible to the first global pandemic in more than 100 years? I’m not sure. There are many viewpoints out there that claim we ought to have done this or that, but the fact of the matter is that we are where we are and must deal with the current issues. There are various factors influencing the economy right now, and they might be fixed in a few months or perhaps in a few years. As previously stated, historically, the American economy has bounced back, so that’s what I’m betting on. Compared to other nations, our economy is in a far better shape. We are not experiencing negative interest rates, lockdowns, or war. Consumer spending is still high, incoming economic data is strong, and businesses are still beating earnings expectations. That looks like a good economy to me, especially considering how others have fared.
 
We’ll face many obstacles on the way to our destination, but I have faith that we’ll make it. It’s crucial to avoid letting unknown variables drive you to reevaluate your risk tolerance or overload the foundation of a durable portfolio during this rocky journey. Investing is a marathon that calls for mental fortitude and endurance. You must be able to maintain focus and stay on course until the finish line.
 

Andrew M. Ochoa
Portfolio Administrator 

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All charts and data from Bloomberg unless otherwise indicated.

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