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Subject to Change, of Course

We crossed the timeline into the New Year of 2024 and guess what? Nothing has changed. The Israelis have continued the war against Hamas while tensions in the Middle East increase with rocket attacks against U.S. Naval vessels and “garrisoned” troops scattered around the region. We seem to have become the “state of the art” when it comes to measured responses. We have become the fighter who stepped into the ring with a measured counterpunch as his only weapon. What is the probability of his success without adding a “knockout” punch to the arsenal? The odds seem to be near zero, so we feel that the Biden administration will more likely “up the ante” in the regional skirmish, especially with a coming election. This increased risk has a direct correlation to the world’s price of oil and any resulting inflation.

Likewise, we see no end to the Ukrainian conflict. We do see, however, an increased social and economic cost associated with this war. In this election year, war promises to be a major issue for Americans.

Xi’s craving for a reunification of Taiwan continues unabated. His warnings are more frequent and clearer despite China’s economic struggle with deflation. His “tightrope” balancing act will precede the increasing rhetoric about China’s relations as the election process heats up in the U.S. All the while, the risk of war will probably be increasing in the months ahead.

The world’s economy is in some phase of emerging from a central bank policy that has been in place to fight inflation. Accordingly, we can expect unstable currency exchange rates and interest rates, as each economy reflects a different experience with global inflation.

Back at home, our firm is moving into our newly renovated office. I am hoping that the increased productivity coming from the renovation will go a long way toward paying for the investment.

Kalei Cadinha-Pua’a has been transitioning over the last year adding the responsibilities of the Chief Investment Officer to her Chief Executive Officer role. She has done marvelously well and will be formally accepting the Chief Investment Officer role going forward.

Likewise, Michael D’Addario will be our Vice President of Fixed Income. In that role, he will be responsible for the bond investments that we make. His responsibilities will include the trading process and the appropriation and organization of timely information and data for use in our bond decisions. Michael has had a successful career on Wall Street working in fixed income. His last job was with Goldman Sachs as Managing Director in fixed income, currency, and commodities. Michael will be collaborating closely with Kalei and me, the Chief Strategist, on the fixed-income portion of our investment strategy at Cadinha & Co.

The outlook for stocks and bonds is quite murky. There are aforementioned geo-political events that could immediately change the environment for stocks and bonds. We simply have to monitor the news events very closely. There will also be economic news events released that will shape the mood and prognosis for the markets. Additionally, there will be political events, news, and discussion that emanate from these. All of these will help shape the prognosis for the upcoming election. Consequently, in the pre-election market we will become news and data dependent for the next nine months.

The upcoming election will be especially critical as our country is currently very polarized. The electoral outcome will shape policy and affect life in America for a long time. The make-up of the House of Representatives and the Senate is just as critical as the choice of President and Vice President. Local elections will be important in determining the livability of each state and city.

It is for these reasons that when looking at the future, we must consider two different scenarios: the pre-election and post-election scenarios. All we can say is “change appears to be inevitable,” as does more portfolio activity.

Presently, the stock market is in an uptrend, but stock prices are over-priced at 20x earnings. Normally, at this stage of a Federal Reserve-induced cycle, the price/earnings ratio would be below 15x.

The restrictive Fed policies have diminished the money supply (M-2) by -5.5% over the last year, and interest rates have surged into an inverted yield curve (when short term interest rates are higher than long term – 10-year rates) for over a year. Inverted yield curves have preceded eight out of the last eight recessions. So why not this time?

The Conference Board’s index of leading economic indicators has declined for the last 20 months in a row and is down -7.6% on a year-over-year basis. In the words of economist Dave Rosenberg, “This is a pattern eerily similar to the mid-1970’s and early 1980’s and history tells us that these ended up not being soft landings, or plain vanilla mild recessions. They were severe and led to sharply lower bond yields and equity valuations.”

These words echo our sentiments, and we find ourselves somewhat at odds with the consensus view calling for a solid year of economic growth. We are bullish on bonds, growing more bearish on the stock market, and cautious overall. Subject to change, of course.

We thank you for your confidence and loyalty, and wish you a healthy, happy, and prosperous new year.

About the Author

Harlan J. Cadinha
Founder, Chairman and Chief Strategist




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