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During the first quarter of this year, equity markets built on last year’s fourth quarter gains and continued their climb. Continued economic strength and lower inflation gave investors reasons to be optimistic that the economy can continue to grow while avoiding a recession. The bond market rally of last year paused, as this same economic strength caused bond investors to rethink their optimism that the Fed will be cutting interest rates multiple times this year. The current bull market in stocks has been impressive. Stocks have rallied with the “better than almost everybody thought it would be” U.S. economy. As inflation has dropped, recession fears have faded, and equity markets are at all-time highs. The S&P 500 Index set 17 all-time closing highs in the first 50 trading days of this year, the most since 1998. Because the S&P 500 Index is a market weighted index, as opposed to the Dow Jones Industrial Average, which is an equal weighted index, the largest companies have an outsized impact on the index. In fact, the seven largest tech stocks (Apple, Microsoft, Google, Amazon, Nvidia, Meta, Tesla) account for 30% off the S&P’s value, an all time high. Last year, these seven stocks gained an average of 71%, while the other 493 stocks in the index averaged a 6% gain. Looking at a static return number definitely does not tell the whole story of the strength of the stock market. The bond market has not moved much this year as segments of the economy continue to expand faster than the Fed wants them to. While inflation has dropped dramatically from its high in 2022, it remains above the Fed’s target, and as long as that is the case, interest rates are likely to remain elevated, especially on the short end of the yield curve. The Fed has reiterated that they plan to cut rates at least three times this year, but we will need to see some of these inflationary pressures ease before this happens. Until then, the yield curve remains inverted, and the risk remains elevated that the Fed will not reduce rates in time to prevent a recession. GDP growth for last year came in at 2.5%, which is quite remarkable given the forecasts of most analysts at the beginning of the year. It looks like GDP growth in the first quarter of 2024 will also come in around 2.5%. Most forecasts we are seeing show our economy growing this year about the same as it did last year. We don’t see anything that would make us forecast growth differently than this consensus. We think inflation will continue to drop to closer to the Fed’s target of 2% later in the year. Our forecast for the markets has not changed since the end of last year. Stocks will be helped by dropping inflation rates and by lower interest rates, but with sky high valuations, there are elevated risks if there are unforeseen events. Bonds will also benefit from lower interest rates but will tread water if inflation and interest rates stay higher than normal. Much depends on the Fed. Wabash Capital

Team member Ginger Scott has successfully completed the training, validation and testing necessary to become a Registered Fiduciary for 2024. The Registered Fiduciary (RF™) Certification identifies financial professionals and organizations as competent fiduciaries that have achieved pertinent educational qualifications and licenses, learned required skills, and have passed a background check. The RF™ award to Ginger Scott recognizes particular skills in the area of Retirement Services In addition, Ginger and the team provide Investment Management and Advisory services to Individuals, Trust, Corporations, Banks and Labor Unions. In acting as a Registered Fiduciary Ginger Scott and the Wabash Capital Team is committed to always acting in the best interest of clients, using the skills, ethics and focus on the client needs that the Certification represents. Mrs. Scott also holds the Accredited Retirement Plan Specialist Certification. “At a time when the public concern has been elevated by years of financial excesses and scandals, the RF™ validation process offers comfort in the knowledge that our firm has been found worthy of this distinction” said Don Edwards, President, adding “We have always been dedicated to our clients and this award gives us the independent confirmation of this policy.” Wabash Capital, Inc. is SEC registered Investment Advisor under the Investment Advisor Act of 1940.  The Registered Fiduciary Certification is based on the 2010 Fiduciary Standards of the Fiduciary Standards Board and validated by Dalbar, Inc., the independent expert. The Fiduciary Standards Board is a not-for-profit (501(c)(3)) organization established in September of 2000 to develop and advance standards of care for investment fiduciaries, which includes trustees, investment committee members, brokers, bankers, investment advisers, money managers, etc. The Fiduciary Standards Board is independent of any ties to the investment community and therefore positioned to be a crucible for advancing fiduciary standards throughout the industry and to the public. Dalbar, Inc. is the financial community’s leading independent expert for evaluating, auditing and rating business practices, customer performance, product quality and service. Launched in 1976, Dalbar has earned the recognition for consistent and unbiased evaluations of investment companies, registered investment advisers, insurance companies, broker/dealers, retirement plan providers and financial professionals. Dalbar awards are recognized as marks of excellence in the financial community.

This time last year, most economists were calling for a recession in 2023. Inflation was 9% and the Federal Reserve was rapidly raising interest rates in an attempt to lower it. Historically, these conditions almost always lead to a recession. Stock investors braced for further trouble after a difficult 2022. As is typical after a bad year for investors, we experienced large market swings in 2023. The first six months of the year were positive for both stocks and bonds. The next four months were negative for both. We ended the year with a furious rally in the stock market and the bond market in November and December, giving us solid returns across the board for the year. Inflation has dropped to 3%, and the most anticipated recession in history failed to materialize. For the year, the U.S. economy performed better than almost everyone expected it to. While the Fed may yet achieve the soft landing they are looking for, we are certainly not past the threat of a recession. The economy is definitely slowing, and we will need to wait to see whether it slows enough to keep inflation at bay, or whether it slows too much and dips into recession. Just like the predictions for this year, most economists expect lower GDP growth for 2024 than we saw this year. The yield curve remains inverted, which typically precedes a recession. The Fed has indicated they are open to lowering rates in 2024 to keep economic growth positive. Time will tell, but the Fed, in spite of keeping interest rates too low for too long and letting inflation get away from them, has been very good at keeping the economy growing. So where does this leave us as investors? Stocks benefit from dropping interest rates, so a slowing economy and lower interest rates are a positive. The economy slowing too much and causing earnings to drop would be a negative. It is also worth noting that valuations in the stock market are extremely high, making stocks more susceptible to big drops if things don’t go well. Bond investors will also benefit from dropping interest rates and a slowing economy. Bonds seem the safer bet right now, but we suspect stocks may do well in 2024, especially if we avoid a recession. If we do experience a recession, we believe it will be relatively mild. We lost an investment legend in 2023, as Charlie Munger, Warren Buffet’s investing partner, died at age 99. Charlie was always willing to verbalize his opinions, almost always with humor. Here are a few of our favorite quotes: “If I can be optimistic when I’m nearly dead, surely the rest of you can handle a little inflation”, “Being rational is a moral imperative. You should never be stupider than you need to be”, “Those who will not face improvements because they are changes, will face changes that are not improvements.” We can all learn much from people like Charlie Munger. Never hesitate to contact us if you have questions about your investments. Also, let us know if you would like an updated copy of our Form ADV, Part 2. Wabash Capital

After a strong first half of the year, increased concerns that interest rates will continue to climb caused markets to fall during the third quarter. Stocks, after starting a new bull market early this year, neared correction territory in September. Bonds have been drifting lower as interest rates have slowly and consistently moved higher. Rising energy prices have stoked fears about inflation, and with the Federal Reserve hyper focused on the inflation rate, most economists are now expecting interest rates to stay high longer than initially thought. GDP is expected to rise over 4% during the third quarter, which is amazing given the current level of interest rates. It looks like we’re in for a bumpy ride. We have spoken at length in past letters about the inverted yield curve. This doesn’t happen often, but when it does, it almost always foretells a recession. The current inversion is the longest and deepest inversion since the early 1980’s. While many analysts and economists have stepped back from their recession predictions, the fact remains that we are at an elevated risk of recession, and the deeply inverted yield curve cannot be ignored. We are often asked why higher interest rates make the markets go down. Increasing interest rates hurt both stocks and bonds, but in different ways. With bonds, it’s a matter of simple math. As rates move higher, existing bonds become less attractive relative to newer bonds. Movements in bond prices as rates change are easily calculated. Duration and convexity tell us how much bond prices will rise or fall with changes in rates. When rates rise, bond prices drop, and when rates drop, bond prices rise. This relationship never changes. Rising interest rates hurt stocks in several ways. Appropriate valuation calculations for stocks are usually done through models that use short term rates to discount cash flows. As rates rise, valuations drop. Higher interest rates also make safer investments like bonds more attractive relative to stocks. Also, high rates slow economic activity, leading to lower profits for businesses, thus dropping stock prices. The Federal Reserve has a very difficult job. They are charged with keeping the economy growing while doing it with low inflation. They have been mostly successful at this for forty years. They had some missteps coming out of the pandemic but that was a unique set of circumstances. It will be interesting to see how history judges them. Over the next twelve months we could very well see energy prices drop along with inflation. This would likely lead to strong rallies in both stocks and bonds. If the Fed achieves their soft landing, consumers and investors will benefit. Until then, we, like everyone, will be watching the Fed. Wabash Capital

Conflicting Data During the second quarter, both the stock and bond markets experienced above normal volatility as economic reports gave us mixed messages about where the economy is headed. For the quarter, stocks added to their gains from the first quarter, and had a solid first half of the year. After a strong first quarter, the bond market slowed slightly during the second quarter as the Federal Reserve indicated more interest rate increases may be required later this year. The economy is much stronger than most analysts thought it would be at this point. The global and U.S. economies are continuing their recovery from the terrible effects of the Covid pandemic. So great was the economic damage that we will likely be dealing with the fallout for quite some time. Some changes, like remote work, may be here to stay. Other issues, like supply chain problems and higher inflation, are already improving. There has been a lot of conflicting economic data that has made forecasting difficult. In spite of a yield curve that is at its biggest inversion in forty years, GDP is strong, with no recession in sight. We have the highest interest rates in years, but housing starts surged over 21% in May, the largest jump since 2016 and just the seventh increase of more than 20% since 1989. The Fed is trying hard to slow the economy down, but first quarter GDP was just revised upward, to 2%. Goldman Sachs lowered their prediction of a recession to only 25%. Consumer sentiment has dropped but remains higher than at this time last year and consumers are spending freely. Monthly job growth has averaged 341,000 over the past twelve months, a remarkable number given the Fed’s rapid interest rate hikes. The rate of inflation has been dropping steadily since last Fall, and expectations for the long term inflation rate are in the 2.9-3.0% range. Conclusions are difficult to come by in this environment. At this point, it seems likely that interest rates will stay higher longer than we thought six months ago. Investors were hoping to hear that the Fed was finished raising interest rates and were disappointed to hear that there may be further rate hikes. Consumers, on the other hand, largely shrugged off this news and have continued spending, even as they expect a slowing economy. The housing market, likewise, is rising as if interest rates are low with no end in sight. The future will definitely become clearer when interest rates come down, inflation drops, and market valuations are lower. At this time, we think a recession is more likely than not, but will probably be mild. But, it will all depend on the success of the Fed in slowing the economy without causing a deep recession. Time will tell. Wabash Capital