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Threading the Needle

May was a quiet month for equity markets, with volumes at some of the lowest levels in the past couple years, and relatively little in terms of price action, with the S&P 500 ending the month not far from where it began. The same cannot be said for cryptocurrencies, which experienced significant volatility over the month, with Bitcoin falling roughly 40%, and many other cryptocurrencies following in its wake. While there wasn’t a clear catalyst for the correction, some market participants cited concerns over potential cryptocurrency regulation both in the U.S. and China, as a potential driver.

With respect to the broader economic outlook, conditions continue to evolve in line with our expectations. The reopening of the domestic economy is ongoing, and employment continues to rise, although we expect continued tightness in the services sector as businesses rapidly staff up as we head into the summer months. The evolution of spending patterns is also in line with our expectations, in the sense that consumers are spending more on experiences (i.e., travel and leisure), and less on at-home shopping.

While the overall economic outlook is bright, it’s important to keep in mind that this recovery is going to look very different from those that we have had in the past, for a number of reasons. For instance, in this recession, not only did housing prices not fall, they soared — in some areas, to the highest levels on record. This has pushed prices above what many homebuyers can/will pay, which has resulted in slowing sales, and a sharp drop in homebuyer sentiment over the past couple of months, as demonstrated in the exhibit below. The challenge for policymakers going forward, is how to unwind the Covid-19 emergency measures (housing, fiscal, monetary, etc.), which has resulted in frothy conditions in some parts of the economy, without derailing the broader economic trajectory. It will be a tricky needle to thread, no doubt, as demonstrated by the latest Fed meeting, where they acknowledged that inflationary pressures may be more persistent than they had originally anticipated, given the continued disruption in global supply chains.

All of this lends credence to our philosophy of staying focused on the long term and avoiding the flash-in-the-pan investment bubbles that pop up in periods of rapid monetary expansion. They inevitably deflate, as we have seen with cryptocurrencies, meme stocks, and other areas that grabbed the public’s attention over the past 18-months. As Warren Buffett once said, “price is what you pay, value is what you get.”

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