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Jeff Auxier’s Summer 2022 Mark

The S&P 500 experienced the worst first half in 52 years and second worst half since its inception as the market declined 16% for the quarter and 20.1% year-to-date. Rising rates in response to surging inflation compressed valuations. The bond market as measured by intermediate 10-year treasuries had its worst six month decline since 1788, down 11%. Long duration, money-losing growth stocks were hit hard. The tech-heavy Nasdaq Composite lost 22.3% for the quarter. The Morningstar US Growth Index lost 25.3%, its biggest decline since the 2008 financial crisis. The Morningstar Large Growth Index was down 29.6%, which was its worst since Q4 2000. The best performing sectors were consumer staples, healthcare, utilities and energy. This was only the second time in the last 40 years where both bonds and stocks recorded losses for two straight quarters. The S&P Global Bond Index fell 8.51% in Q2. The labor market remained tight with a 3.6% unemployment rate and jobless claims consistently fell during the quarter. At the end of April there were nearly two job openings for every unemployed person. Inflation creates a whole new challenge increasing the importance of valuation, enduring business models and sustainable cash flows.

The blistering pace of new initial public offerings (IPOs) has slowed now that rising rates and growing inflation have elevated the risk of betting on money-losing companies at any cost. 2021 was a record year for IPOs with over 1,000 new listings in the US, up from 471 in 2020 and 242 in 2019. 59% of these offerings were done through special purpose acquisition companies (SPACs). Around 80% of the IPOs in 2021 had operating losses. US IPO volume is down 95% in the first six months of 2022 compared to 2021. Biotech IPOs have also slowed, and the second quarter was the slowest for new offerings since 2009. Only about 10% of the 111 biotech IPOs in 2021 are trading at or above their offering price. Investors have been turning their eyes to companies with established business models and positive cash flows. Companies with negative cash flows are underperforming companies with positive cash flows for the first time in five years. Furthermore, we see the bubble in venture funding bursting. Venture funding hit $342 billion in 2021, up from $130 billion in 2020. This compares to $124 billion in the last mania peak in 2000. Grant’s Interest Rate Observer

Inflation Driving Recession Risks and Repricing Valuations

Inflation is a top concern for consumers, and many are cutting back on nonessentials. The consumer discretionary segment was the worst performing sector in the S&P 500 during the quarter. Inflation rose 9.1% in June, up 1.3% from May and the largest year-over-year increase since 1981. The Fed has been accelerating their rate increases in an effort to curb inflation hiking rates by 50 basis points in May and 75 basis points in June. This was the first 75 basis point hike since 1994.

The hope is that these aggressive measures will lead to a soft landing for the economy, but with such a wide gap between inflation and the federal funds rate that appears difficult. Since the Fed started in 1913, 90% of attempts at monetary tightening led to hard landings. Economists at Bank of America believe that the rapid push for decarbonization and green energy could also fuel inflation due to the high costs of infrastructure investments that will be required and the increase in energy consumption due to electric vehicle (EV) growth. The International Energy Agency (IEA) estimates that their net zero energy transition will cost about $116T globally over the next 28 years. Housing costs continue to rise and represent about one third of CPI. According to the Bureau of Labor Statistics the average American is spending about 35% of their income on shelter. In May median rents surpassed $2,000 for the first time ever. Average rents as of June increased 14.1% year-to-date according to Redfin. In our local market we are seeing renters paying about 40% more than they were last year. The reshoring of supply chains could also contribute to higher inflation going forward.

Second Quarter 2022 Performance Update

Auxier Focus Fund’s Investor Class returned -9.11% in the second quarter and -9.17% YTD through June 30. For the quarter the cap-weighted S&P 500 Index declined 16.1% while the DJIA lost -10.78%. Small stocks as measured by the Russell 2000 returned -17.2%. The MSCI Emerging Markets Index shed -11.45%. Stocks in the Fund comprised 89.3% of the portfolio. The equity breakdown was 80.5% domestic and 8.8% foreign, with 10.7% in cash and short-term debt instruments. A hypothetical $10,000 investment in the Fund since inception on July 9, 1999 to June 30, 2022 is now worth $51,204 vs $41,645 for the S&P 500. The equities…

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