Accretive Q2 2022 Client Letter

Dear Clients and Friends of Accretive,

At the end of the second quarter, billable assets under management at Accretive totaled approximately $220 million.  As a result, we are waiving 7.5% of our management fee for the third quarter of 2022 under our Client Alignment Program™ (CAP).

Second Quarter Recap

The second quarter was, in many ways, simply a continuation of the difficult first quarter.  The broad equity indices all experienced steep declines.  

More conservative bond investments suffered a near 5% decline as interest rates continued to rise, and riskier bond investments fell more as capital markets began to slow.  The rise in interest rates, widening of credit spreads, and general market weakness are signs that financial conditions have tightened significantly.  While the Fed has tightened policy, the market itself has arguably tightened more.    

The Current Environment

Last quarter we said a “fog of war” was an appropriate description for the market environment.  While the third quarter is off to a much better start, there is still a lot of uncertainty on the economic picture.  Inflation is still high but is expected to trend lower on the back half of the year.  While nominal GDP is still growing, the US recently reported its second straight quarterly decline in real GDP.  There is debate about what constitutes a recession and whether we are in one presently.  Regardless of the classification, things appear challenging at the present moment, and they seem even more difficult abroad.

In Europe, increases in energy prices are causing some mind-boggling inflation readings.  While the US Federal Reserve is well into its tightening cycle, the European Central Bank just recently raised its target rate from negative 0.50% to 0%.  The disconnect in inflation outlooks, interest rates, and tightening cycles has sent the Euro back to near parity with the US dollar.  Further complicating matters are the economic inequalities between various countries of the Eurozone.  The challenges of having a monetary union without a fiscal union continue to create tension within the EU and problems economically.  

In Asia, the Bank of Japan is defending a 0.25% interest rate peg on 10-year Japanese Government Bonds by buying as many of those bonds as necessary.  The result of creating Yen to fund those purchases has been a steep decline in the Japanese currency.  Meanwhile, the Chinese economy is slowing; the result of a firm zero-Covid policy.  

The net effect of the economic issues abroad has been a very strong dollar. To us, this makes sense. From our perspective the United States, even with all its issues, appears to be in a position of relative economic strength vis a vis the rest of the developed world.  

Presently, we are in earnings season.  The expectations are for many companies to reduce their projections, but it is possible that the market is already at or ahead of the reduced guidance.  So far, earnings revisions have generally been less bad than feared and that has been supportive of markets.

Clients often ask how or when a recovery could start to take hold.  We believe that no one knows when a recovery will happen, it is only possible to know in hindsight.  This makes market timing an especially risky and, in our view, an ill-advised endeavor.  That said, it is our opinion that the bond market could recover before the stock market, but the gap between the two markets recovering could be small, and they may recover nearly in tandem.  While it is possible that we saw a recovery start mid-June, it is equally possible that is not the case.  

Accretive’s Portfolios

Overall, our allocation strategies were in line with broader markets and our individual equity portfolios were similar.  Aggressive portfolios fell more than conservative ones, as the bond market fell less than the stock market.  To us, this makes sense, given what transpired this past quarter.  

Concluding Thoughts

The market environment has been challenging over the past year.  Many times, the right and hardest thing to do is to wait it out.  We have consistently said the right investment approach is one that you can stick with, in good markets and bad.  To that end, almost all of our clients have done just that.  

We appreciate the trust and confidence our clients have in us. If you have any questions or concerns, please feel free to contact us.  We would welcome speaking with you.

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Sincerely,

Gary C. Ribe, CFA, CFP®

Chief Investment Officer, Managing Partner

gary@accretivewealthpartners.com

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