The Word of the Year - 2nd Quarter - 2022

 The United States has not experienced inflation this acutely in more than 40 years. For individuals and businesses alike, inflation has raised expenses, decreased purchasing power, and altering behavior. Its effects, and resulting Fed actions to tame it, have had a profound impact on the price of virtually all assets. Though we are just at the halfway mark, we think it’s safe to dub “inflation” the word of the year.

The inflation we have today was brought about by a series of unwieldy events. COVID led to historic fiscal and monetary stimulus, supply chain disruptions, and a change in consumer behavior. Russia’s invasion of Ukraine and the world’s response to it has caused energy and agricultural commodities to spike. The Fed and many others hesitated to combat the initial signs of inflation quickly as it was thought to be transitory.

The U.S. Bureau of Labor Statistics’ Consumer Price Index (CPI) is the primary measure of inflation. It increased 9.1% year-over-year for the month of June. A full 24% of the index is comprised of housing related costs, which have soared over the past two years. The reasons are easy to appreciate, including the shift to at-home work and school, and ultra-low interest rates.  The rapid increase in interest rates over the past six months has already impacted buyers, as higher interest charges on top of higher home prices has reduced affordability. We expect to see housing prices not just stabilize, but possibly contract over the next year. This may go a long way in cooling the ‘wealth effect’ and normalizing the demand side of the inflation equation.

We’ve noted in the past that globalization has propelled economic activity. During this period, inflation remained subdued due to significant productivity gains provided by innovated technologies. The downside, of course, is now painfully evident. The lack of supply chain redundancies has led to logistic challenges and part shortages. The result, inflation. Some are now declaring the globalization movement impaired. This is oversimplified and overstated in our view. It will continue to evolve. We remain optimistic that conflict and tribalism will eventually subside. Economic prosperity is a powerful motivator.

It is a fool’s game to call a market bottom and we won’t start now. We do, however, believe much of the speculation and leverage added to markets in recent years has been flushed out. Public markets have rapidly priced in the likelihood of a recession starting later this year or early next year and assume no growth in corporate earnings. Prices today represent a far better value than they did a year ago.

When consumer behavior reverts, confidence returns and investors anticipate greater stability, valuations should rebound to normalized levels. We anticipate this will occur once the Fed is nearly finished raising rates in the current cycle, which could occur before year-end.

Thank you for your partnership and we look forward to continuing the conversation.

EPIQ Happenings

EPIQ Investor Day – Friday, September 23rd

EPIQ will once again host several sponsors and investment managers in our office who will share perspectives and detail specific opportunities. Details to follow.

EPIQ Partners