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We like the description of our current situation as an “anti-Goldilocks economy”: an economy that will be both too hot in terms of inflation and too cold in terms of growth. The global economy and policymakers are confronted with a stagflation supply shock that is negative for growth and will tend to push up inflation further. There are four main forces at work: 1) higher energy and food prices, 2) disrupted supply chains and trade flows, 3) tighter financial conditions, and 4) lower business and consumer confidence due to heightened uncertainty.

So, yes, the financial markets are nervous and confused. Three months ago we foresaw the possibility that the stock market might dip “for some period” into bear market territory. That dip has occurred but the question now is: How long will that period last? The forecasts from the Wall Street analysts are all over the place with regards to the length of the current bear market. The forecasts vary depending upon judgements about the course of the Ukraine war, when supply chains might improve, how well the Federal Reserve will navigate, and the impact of so much uncertainty on corporate earnings.

At Hudson Advisors, we expect the stock market to remain negative and probably worsen in the second half of the year. Looking to 2023, we hope the market will turn around if somehow inflation subsides and we avoid a deep recession. But we have no prediction on the timeframe for that market turnaround.  Nonetheless, as before, we think U.S. equities remain among the best and safest long-term investments. We encourage our clients to be positive on equities even though our investment approach in the period ahead is careful and defensive.

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