During the second quarter, the U.S. economy and equity markets were resilient in the face of continually higher interest rates. Facing stubbornly persistent inflation, Federal Reserve chief Jerome Powell again raised rates 25 basis points in May, the 9 th consecutive increase, bringing the Fed Funds rate to 5.25%. While still present, the fear that continued market tightening will result in an interest rate driven recession was largely ignored during the quarter, as the S&P 500 hit its highest level since April 2020. The excitement over A.I. (Artificial Intelligence) contributed significantly to the boost in tech stocks and had several financial talking heads proclaiming a “new bull market” was under way. While we are excited about the prospects of A.I., significant risks remain in the markets. The impact from multi-year rate hikes usually take much longer than most expect. In addition, market valuations have again gotten significantly ahead of themselves. The price to earnings ratio (P/E) on the S&P 500 now currently sits at 25.74, showing us the broader markets are almost 61% overvalued and suggesting that allocating broadly at these levels would mean taking on significant risk. In a long-term investing plan to increase wealth, valuations matter and where you begin your journey can significantly impact your investment success. To quote Warren Buffet, “Price is what you pay, Value is what you get.” With that in mind, we’re being very cautious while entering the stock market today, trying not to overpay for assets. Additionally, with the heightened rates, we’re being paid 5.2% in money market while we wait. Not a bad current tradeoff considering the CAPE ratio (cyclically adjusted P/E ratio) is predicting the annual return on the broader stock market will be a dismal 2.35% over the next ten years. Patience and prudence currently rules the day.

Major stock indices posted gains of 8.4% and 4.0% for the S&P 500 and the DJ Industrial Average in Q2, while the NASDAQ Composite Index rose again; this time an impressive 15.4%. Internationally, the EAFE gained 3.0% for the quarter. The bond markets pulled back some, as the U.S Aggregate Bond index fell - 0.8%. Gold finished down slightly for the quarter, but remained higher by 5.2% for the year. Crude oil also dropped slightly in Q2, down -6.6%. The average stock in Morningstar’s coverage universe is now undervalued by 3%. Sector wise, Communication Services, once again was the largest undervalued sector, trading 20% below fair value, followed by Real Estate and Financial Services at 15% and 12% under fair market value. Technology was the most overvalued sector, ending the quarter 8% over fair market value, followed by Industrials at 2% over 1 . From our conservative management perspective, market valuation alone has given rise to our unwillingness to get aggressive with allocation of new money. We’re opting to take larger positions for client portfolios in money market funds. We’re also beginning to look at medium-term treasury bonds to lock in some longer-term yields, as we digest whether the Fed will begin to lower rates in the next year or so. We understand the risks facing the markets and the economy today and are committed to helping our clients navigate these challenging times and look forward to continually earning your business, your referrals and you’re your respect.

Jack A. Kennedy

Chief Investment Officer