A lot has changed in the previous months since the start of the first quarter of 2022. The stock market was pushing to  new highs at the end of last year, and it finished the year with high double-digit returns and one of the lowest levels of  volatility since 2017. Starting in early January, several Federal Reserve presidents announced to the market and  economists that their plan to raise rates this year would be accelerated, and that they would be raising rates faster than  predicted due to inflation being more persistent than previously anticipated. In the first quarter of this year, the S&P  500 and Growth sectors of the market mostly gave up last quarter's strength. Russian President Vladimir Putin  dispatched military forces to Ukraine in February, igniting Europe's worst military crisis since World War II. The invasion  of Ukraine in March provoked sanctions against Russia, skyrocketing the price of oil in just a few weeks. Oil rose by 30%  overnight, marking one of the fastest price jumps since the early 1990s supply shock triggered by the Gulf war, and the  highest overall price for the commodity since 2008. As we go into the next quarter, the market is beginning to show  indications of relief, with the market posting its highest single day of buying volume since June of 2020. All of these  quickly evolving market elements, many of which are frightening, have resulted in record levels of investor uncertainty.  In the midst of all of this volatility, however, the market's "Smart Money" has never been more confident. We'll go  through all of these subjects, as well as what to expect in the coming months and the coming year.

Big themes in the market this year include:

1. The return of Inflation. The Federal Reserve has notified the market that inflation has returned and is projected  to last longer and at a greater level than previously anticipated.

2. Increased Interest Rate Hikes. The Federal Reserve has notified the market that it will be increasing the federal  funds rate faster than previously expected this year in order to combat the further rise of inflation.  

3. Russia Ukraine War. The war in Russia and Ukraine has disrupted supply chains and commodities markets,  raising concerns of broader economic impacts.  

4. The Commodity Market Surge. The price of oil, among other commodities, have surged since the start of the  war. The movement of these prices back to long-term averages will help inflation return back to normal levels.

5. Record Level Optimism. Despite the uncertainty and turmoil, Smart Money investors are approaching  confidence levels seen only twice in the last decade.

The chart below shows the S&P 500 since October of last year, with the latest six months highlighted. The solid red line  on the graph depicts the market's drop from the beginning of this year to the lows reached earlier this week. During the  selling, the S&P 500 sank about 15%, while the Dow Jones Industrial Average fell 11%, and the tech-heavy Nasdaq fell  21%.

It’s been a stomach-churning ride filled with volatility. The VIX volatility index hit a new high of 38, one of the highest  levels seen since the pandemic lows and the financial crisis. As last year came to a close, optimism was strong as fears of  increasing inflation faded, and tolerance for next year's predicted rate hikes grew. This setting allowed for a strong and  upward market, until unfavorable economic forces began to emerge quickly.

On January 19^th, Jerome Powell says inflation hasn't improved since December, implying that there will be more than  four rate hikes in 2022 if inflation data doesn't improve quickly enough. The latest data has prompted the Fed to seek up  to six rate rises this year in the coming weeks.

On February 24^th, Russia invaded Ukraine, igniting one of Europe's worst military conflicts in 50 years, plunging the  Russian stock market by 80% in just over a week, compounding existing inflation difficulties.

On March 8^th, Oil prices increased more than 30% in four days, marking one of the fastest price jumps since the early  1990s supply shock induced by the Gulf war.

On March 18^th, The S&P 500 experienced a near record level of buying volume in a one day, the greatest since the  pandemic's lows. The Nasdaq had its largest one-week return since the Coronavirus Pandemic, while the aggressive  growth and innovation area of the market had its best one-week return in its entire eight-year history.

The return of Inflation.

Starting in June of 2020, Inflation jumped above its long run average of 2% to over 3% by the end of the year. Inflation  was expected to moderate in the 3 to 4% range for the full year of 2021, and maintained that level mostly until the very  beginning of 2022, when, unexpectedly, inflation began to rise into the 4 to 6% range, prompting the Fed to come out  and increase their projected number of interest rate hikes for this year in order to moderate and prevent inflation from  rising above present levels.

The graph below shows three commonly used inflation indices (similar to the CPI) that the Federal Reserve looks  at when making conducting policy. The Federal Reserve is particularly concerned with the orange line, Median PCE  Inflation. This inflation statistic examines various categories and standardizes the overall inflation rate by the relative  relevance of each category. Inflation began to pick up steam in early January, when the price of oil surpassed $90, and  the broader commodity market followed suit. Inflation soared to over 5% in January 2022, a level the market has not  seen in a long time.

This leads us to the question of what the federal reserve is expecting from here (after being slightly off last year with  their forecast) and what they are planning to do about it. The FOMC is the body of the Federal Reserve that conducts  monetary policy, and regularly communicates with the market every 6 weeks or so.  

Every year, the FOMC gathers and holds eight public meetings per year to discuss inflation and monetary policy. In these  meetings the FOMC reviews economic data, inflation, and general financial conditions. At every meeting, the FOMC  publishes past economic conditions, including inflation, and their outlook on those conditions moving forward.  

The FOMC has two jobs: to ensure maximum employment and maintain price stability. This is the term Jerome Powell,  the chairmen of the Federal Reserve, has been reiterating to the market over the past several months.

The graph below was presented following the FOMC meeting on December 15th, 2021. The date of the statement's  release is shown by the large arrow. The thinner arrow points to June 2022, a few months from now.

The "Actual" inflation data on the left of the graph has already been realized, validated, and reported. The Federal  Reserve's inflation expectations are shown on the right side of the graph. Within a 70 percent confidence interval, the  shaded blue area on the graph shows the level of inflation expected by the Federal Reserve. The red line represents the  average, or median, of each FOMC member's individual inflation projections.

During the Fed's regularly scheduled FOMC meeting in December of last year, Jerome Powell and the other members of  the Fed stated that inflation is being moderated and is forecast to drop during the full year of 2022. Inflation  expectations for June 2022 were only 2.7 percent on average. The Fed predicted that inflation would decline to 2.2  percent by the end of 2022, then decelerate and return to long-run averages in 2024 and beyond.

Their expectations were vastly different from what occurred. As you can see, the high end of the Fed's 70 percent  confidence interval for PCE inflation was roughly 4% for the start of this year, June 2022. Given that the January PCE  data came in at over 4%, and February's data (still to be announced) is likely to come in over 5% – that’s a pretty big  mistake from the Fed.

As previously stated, since January, particularly January 19th, Jerome Powell publicly informed the market that their  prior plan for raising interest rates this year will be modified due to a higher-than-expected rise in inflation previously  determined in their December meeting. This, understandably, sparked a sell-off in the market over the succeeding week,  adding to investor concern. Since then, the war in Russia has only exacerbated these inflationary difficulties, and the rise  in oil prices has created overall momentum, causing prices in the rest of the commodity market to climb as well.

The FOMC had their most recent meeting on March 16th, almost halfway through the month, and revealed their revised  inflation estimates for 2024 below.

New FOMC predictions as of March 16th, 2022 are available below. The large arrow on the graph represents the median  expected estimates for June of this year, which is slightly over 4%. Inflation is expected to close the year around 3.2  percent, then fall to 2.5 percent by the end of 2024, according to the Fed. The Fed expects long-run inflation to be  higher than 1.1 percent but lower than 3.5 percent in March 2024, with median long-run predictions of 2.2 percent.

For comparison, I've included the identical graph from the previous page below. As you can see in the graph below, The  blue line on the left has not yet shot up in December (due to a delay in releasing early 2021 figures), despite  expectations for rising inflation. Fast ahead to the Fed's (above) March predictions and historical readings, and you can  see the current jump in recorded inflation on the left (above). The above-mentioned March predictions do not show a  sustained surge, as seen in the December graph project.

Interest Rate Hikes.  

Let's talk about the Fed's freshly announced rate hike strategy for this year now that we've talked about inflation.  Because the Fed closely monitors economic conditions on a daily basis and may directly impact the level of inflation by  decreasing or raising the federal funds rate, the Fed is able to provide fair (and frequently accurate) inflation estimates.  The federal funds rate has an impact on lending, and raising it causes commercial banks to borrow less and lend less,  resulting in a decrease in the money supply. In other words, increasing this rate will result in higher interest rates for  businesses and consumers, lowering demand for products and services and, as a result, lowering (or stabilizing) the price  of goods.

The Federal Reserve will raise rates this year, with a total of six hikes expected. The Fed discloses rate hike estimates at  every FOMC meeting, just as they do with inflation projections. This is known as the Fed's "dot plot," which is updated at  each meeting. I've included the Fed's most current dot plot, which was released on March 16th. The years 2022, 2023,  2024, and 2025 are depicted (longer run). The federal funds rate level in percentages is represented on the Y axis.  (Because the Federal Funds Rate is technically within a quarter-percentage-point range (i.e. 0.75-1.00 percent, or 1.50- 1.75 percent), the Fed refers to this rate as the "midpoint.") Each dot on the graph represents 16 separate federal grants  unusual assessments for the corresponding year. Individual responses are not shared with the public, and the dots are  kept private.

According to the dot plot on the previous page, the average of all 16 dots at the end of 2022 is 2.05 percent, 2.35  percent in 2023, and 2.75 percent by the end of 2024. The FOMC's collective participants estimate an appropriate  federal funds rate of 2.40 percent over longer periods, in accordance with forecast inflation levels of 2.2 percent at the  time. So, the Fed aims to hike rates to around 2.5 percent over the next 24 months before gradually lowering them back  to the 2% levels that the market has become accustomed to over the last decade.

A graph of the federal funds rate dating back to February 10th, 2014 is shown below. After a seven-year period of  keeping the target rate between 0.00 percent and 0.25 percent, the Federal Reserve began gradually raising interest  rates in 2016. This frightened the market, resulting in one of the greatest sell-offs the market had witnessed in decades  in the first week of February 2016. The Fed stayed true to its mandate and continued to raise rates until the first half of  2019. Since then, unemployment has fallen to new lows, and the Fed's goal of containing inflation has been achieved. As  a result, the S&P 500 and Nasdaq enjoyed one of their best multi-year periods in decades. After the first half of 2019,  the Fed began cutting rates to guarantee that the US economy remained robust amid concerns about trade wars and slowing global growth. When the Coronavirus pandemic hit in 2020, the Federal Reserve lowered the federal funds rate  to 0%, as jobless claims reached unparalleled levels in US history in a single month. Since the outbreak, the federal funds  rate has stayed at zero percent, and the Fed only recently raised the target rate for the federal funds rate to 0.25-0.50  percent last week on March 16th. The federal funds rate (as depicted in the dot plot above) is expected to be 2.75  percent in 2024, which is consistent with values seen in 2019 and throughout history. On the following page, we'll  examine the market's performance from 2016 to 2019, when the Fed began its most recent rate hike cycle.

Interest Rate Hikes, cont.

(Pease zoom in 200% for the chart below) The Y axis in the graphic below reflects percentage change, while the X axis  represents years dating back to the end of 2014, a year before the Fed began hiking rates. The chart includes the  following five stock market segments:

1. Nasdaq Growth and Innovation (Orange)

2. S&P 500 Growth (Green)

3. S&P 500 Core (Teal)

4. S&P 500 Low Volatility (Yellow)

5. S&P 500 Index (Blue)

Finally, the Federal Funds rate is shown in purple, with the federal funds rate value on the left-hand Y axis ranging from  0% to 2.60%. The Federal Reserve raised interest rates for the first time in early 2016, with more hikes expected in the  future years. This threw the market into a panic, as the first week of February 2016 was one of the worst start to the  month for the S&P 500 in decades. Growth stocks took a beating and bore the brunt of the fall as investors flocked to  low-volatility stocks. The Federal Reserve raised the federal funds rate to as high as 2.40 percent over the following  three years. By that time, the S&P 500 had gained around 80%, while the Innovation and Growth sector of the  market had gained nearly 140%. Throughout the time period given below, Low Volatility has returned 137%, Core has  returned 226%, and Innovation has returned 254%.

2015 and 2016 were extremely choppy and volatile periods of the market. The Dow Jones dropped 1000 points for the  first time, Ebola panic ensued, Crude oil dropped 77 percent, Britain departed the European Union, and the VIX surged  50 percent overnight, resulting in the market's greatest flash crash since 2010. The reasons to sell were there, but given  the incredible strength of corporate America, corporate profit margins and earnings growth continued to soar, leading  to one of the best periods for U.S Stocks in decades. The driver of stock market returns is a factor of earnings and stock  market multiples. Government Bond Yields impact what the PE ratio will be, and on the next page we will wrap up and  

look at how this relationship works, and where we should expect the PE ratio for the S&P 500 to be over the next several  years.

Interest Rate Hikes – how it affects the S&P 500 PE Ratio. (For Technical Readers).

(Please zoom in 200% for the graphs below) The Federal Funds rate, which we covered before, is highly correlated with  the 10-year yield, which has a direct impact on the S&P PE ratio. The Federal Funds Rate and the 10-Year Government  Note Interest Rate are normally 0.50% apart, although the 10-Year Yield is used to compare investing in the stock market  (since you can buy government bonds but not the federal funds rate). The charts go back 60 years to 1962.  

Because it gives investors a choice, the 10-Year Note interest rate has an impact on the S&P 500 PE Ratio. If the 10-Year  Note offers investors guaranteed annual returns of 8%, that's an excellent deal. For many years, the S&P has utilized the  10-year note yield as a benchmark, utilizing it to measure or give itself some indication on where the PE should be. If the  yield on a 10-year note is 8%, the formula is 100/8 = 12.5. That implies you'll have to wait 12.5 years to earn your money  back (this calculation over time is shown below in Orange). If the S&P 500's PE is 30 at the same period (the S&P 500's PE  is shown below in Blue through time), you'll spend $30 for every $1 in earnings, and it will take you 30 years to earn your  

investment back. As a result, the (PE Ratio of 30) divided by (Inverse of 12.5) In this situation, is 2.4. (This essentially  means that in this circumstance, stocks are more than twice as expensive as bonds.). As shown in the second graph, the  average of this ratio over time is 1.01. The current reading is 0.47x today.

The relationship between the two is depicted in the first graph below, which shows the significant correlation between  the 10-Year Yield and the impact it has on determining the S&P 500 PE ratio. Because we know where the Fed Funds  rate is heading and how it impacts the 10-Year Yield, we can estimate that the inverse of the 10-Year Yield will linger  around "50" by the end of 2024. The market has lots of potential to rise over the next five years, with room for the S&P  500's PE Ratio to rise from 25 to 50, bolstered by continued earnings growth in the range 5 to 8%.

S&P 500 PE Ratio vs 10 Year Yield (Inverse)

200

150

100

PE Ratio Inverse

50

0

S&P 500 PE Ratio Relationship to 10 Year Yield

5.00

4.50

4.00

3.50

3.00

2.50 2.00 1.50 1.00 0.50 0.00

Russian Ukraine War.

One of my favorite analysts, Jason Goepfert, wrote this on his blog on the day Russia invaded Ukraine, February 24th. He  studies unusual and extreme market occurrences such as geopolitical tensions, panic and euphoric states, and so on. He  does an excellent job of explaining what transpired in the market over the next few months and year, as the economy  was hit by other similar incidents. Individual and average returns in the S&P 500 over the timeframes listed are shown at  the bottom of the page.

The Commodity Market Surge.

Commodities have been on the rise since the Pandemic and have exploded in price since the Russian war began. Natural  gas, oil, nickel, and other commodities have all contributed significantly to inflation in February and March. The current  situation with Crude Oil is indicative of the current situation with natural gas and many other commodity markets.  Jason's latest research, which was published on March 4th, is attached. In layman's words, he's displaying Oil whenever  the demand for oil (for the next month) surged to the extent which it did earlier this month. He draws a red dot on the  graph to represent each individual occurrence throughout time. This price peak in crude oil is eerily similar to the  current state of most other commodity markets, implying lower prices in the next months and year, easing the current  high levels of inflation.

Record Level Optimism / Peak Econmic Uncertainty.

In the midst of all of this uncertainty, one final piece of research from Jason, as well as one from myself (page 13),  include reasons to be extremely positive. The "Equity Market-Related Econmic Uncertainty" Index is the subject of  Jason's article. Despite all of the recent market turmoil, the market uncertainty index has achieved its fifth highest level  since its inception in 1985, soaring to a level of above "500". The events that led to the other four times the indicator  reached this level are listed below, and the next page illustrates what occured in the S&P over the next year. This  demonstrates that investing during times of uncertainty and fear may be highly rewarding.

Record Level Optimism / Peak Economic Uncertainty.

I've included the Smart Money Confidence indicator (in blue) below, along with a 20-day moving average (in green). The  Smart Money Confidence indicator is a gauge for large and professional traders' confidence and positioning. It runs from  0 to 1, with readings above 0.7 indicating above-average optimism and readings under 0.3 indicating pessimism within  this group. Prior Thursday, March 17th, the average of the previous 20 days readings reached 0.79, the third highest  level in the last ten years (shown below). This indicator last reached this level on March 31, 2020, at the end of the  Coronavirus Pandemic, and in September of 2016, when it was one of the best long-term market entries of the year.  Over the next year, the S&P 500 returned 30% on average as a result of these two events. While the indicator is above  its extreme (the dashed green line – 0.7) the S&P has produced an annualized return of 39%.

Summary

Inflation began to accelerate in the first half of 2022. Inflation hovered at 3 percent to 4 percent for the majority of last  year. According to Fed projections, inflation will fall from current levels of 6 percent to 3 percent by the end of 2022,  averaging 4 percent for the year. The stock market and the economy have suffered as a result of the historic spike in  inflation, which has been exacerbated by the ongoing conflict in Russia and Ukraine. The Federal Reserve has decided to  embark on a timetable of interest rate hikes throughout 2022 in order to combat additional inflation, with the Federal  Funds Rate expected to rise to 2 percent by the end of the year.

The federal funds rate has an impact on lending, and raising it causes commercial banks to borrow less and lend less,  resulting in a decrease in the money supply. In other words, increasing this rate will result in higher interest rates for  businesses and consumers, lowering demand for products and services and, as a result, lowering (or stabilizing) the price  of goods. As predicted by the Federal Reserve last week, the new interest rate hike cycle's target is for inflation to return  to 2.5 percent by 2024.

Investors are experiencing unprecedented levels of uncertainty as a result of the wars in Russia and Ukraine, as well as  concerns about inflation and the Fed's heightened urgency in raising interest rates. Professional investors, on the other  hand, have taken the flip side of the market's concern, displaying record levels of excitement last week as they bought  

into market volatility. Similar conditions of investor uncertainty and professional investor (Smart Money) optimism in  the past have resulted in average returns of 20 to 30 percent for the index over the next year.

DISCLOSURE:

Bull Run Investment Management is a registered investment advisor. Information presented herein is for educational purposes only and does not intend  to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and  unless otherwise stated, are not guaranteed.  

Readers of the information contained on this performance sheet, should be aware that any action taken by the viewer/reader based on this information  is taken at their own risk. This information does not address individual situations and should not be construed or viewed as any type of individual or  group recommendation. Be sure to first consult with a qualified financial adviser, tax professional, and/or legal counsel before implementing any  securities, investments, or investment strategies discussed.  

Portfolio performance is shown net of the advisory fees of 1.65%, the highest fee charged by Bull Run Investment Management and sample trading  costs based on our Custodian’s Charles Schwab’s trading costs. Performance does not reflect the deduction of other fees or expenses, including but not  limited to brokerage fees, custodial fees and fees and expenses charged by mutual funds and other investment companies. Performance results shown  include the reinvestment of dividends and interest on cash balances where applicable. The data used to calculate the portfolio performance was  obtained from sources deemed reliable and then organized and presented by Bull Run Investment Management.  

The performance calculations have not been audited by any third party. Actual performance of client portfolios may differ materially due to the timing  related to additional client deposits or withdrawals and the actual deployment and investment of a client portfolio, the length of time various positions  are held, the client’s objectives and restrictions, and fees and expenses incurred by any specific individual portfolio.  

Return Comparison: The S&P 500 was chosen for comparison as it is generally well recognized as an indicator or representation of the stock market in  general and includes a cross section of equity holdings.  

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS  

OUTSIDE CITATIONS IN ORDER OF APPEARANCE (Pg’s 10-12 Referenced in Supplemental Blog Post PDF): Pg. 3 Median PCE Inflation Data, 2013 – 2022

Pg. 4 FOMC Summary of Economic Projections, Decmber 15, 2021 (Page 12)

Pg. 5 FOMC Summary of Economic Projections, March 16, 2021 (Page 12)

Pg. 6 FOMC Participants’ Assement of Appropriate Monerary Policy, March 16, 2021 (Page 4)  Pg. 7 Federal Funds Rate History

Pg. 8 S&P 500 vs Four listed market segments through a Federal Reserve Rate Hike Cycle. 2014-2022 Pg. 10 Daily Report - Armed conflict triggers historic surge in uncertainty (Blog Post - Page 3)  Pg. 11 Weekly report - A sentiment driven decline, still-solid fundamentals, overseas weakness (Blog Post Page 30) Pg. 12 Daily Report - Armed conflict triggers historic surge in uncertainty (Blog Post Page’s 5 - 6)