Watch Our First Quarter 2022 Economic Commentary with Michael C. Yeager, CFA, CPA, Director of Research

Read our First Quarter 2022 Review

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Many investors saw inflation as the primary risk to the economic outlook as we entered the year.  The combination of high demand for consumer goods and deep supply constraints ignited inflationary pressures last year.  U.S. consumers historically spend roughly two-thirds of their dollars on services and only one-third on goods.  Manufacturing efficiencies and global supply chains have dramatically reduced the cost of producing goods over multiple decades.  For example, the American Iron and Steel Institute reports that it took 10.1 hours to produce a ton of steel in 1980 versus 1.5 hours today.  This type of dramatic productivity gain has a deflationary influence on the price of goods.  Since 2000, core goods inflation has been negative roughly half the time, meaning the price of goods (on a quality-adjusted basis) fell on average.  Our recent experience of very low goods inflation makes the current inflation spike feel even more jarring.

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Read our First Quarter 2022 Review: International Equities Strategy

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Economic and Capital Markets Commentary

Executive Summary:

The market outlook continues to be wrought with high levels of uncertainty.  Inflation continues to present challenges for both the economy and policymakers.  Disruptions in supply continue to weigh on prospects for a recovery in quantities available to industrial and personal consumption.  Though a declining real purchasing power of liquidity at the business and consumer should weigh on prices in a free market, the available supply in an incongruous marketplace currently still satisfies demand at elevated price points.  The more recent disruptions in China’s manufacturing and from Russian invasion of Ukraine pose further challenges to any potential supply responses.  More persistent inflation coupled with future fears of elasticity in demand and, thereby, protracted economic deceleration have weighed on both growth and cyclical constituents in the market, which is an unusual development at this point in a market cycle.  Central bankers are at an unenviable juncture where rates need to move from extraordinarily accommodative levels to neutral rates more prescriptive to the inflationary environment, despite the risk of tipping markets into an economic recession.

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Read the Wall Street Journal Transcript: Investing in Competitively Advantaged Companies with Strong Managements

TWST: Please give us a snapshot of Luther King Capital Management, a bit about the company’s history and business today.

Mr. King: Luther King Capital Management was founded in 1979 by Luther King, after he had served for nearly a decade at Lionel D. Edie. He stepped out on his own to establish a firm here in Texas. The initial clients were from the Fort Worth and Dallas area. The requests from initial clients were for him to establish a firm based in Fort Worth and to focus on the investment research as opposed to marketing.

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