The equity market has been looking for traction over the last few weeks, but it has been slow going. Nonetheless, the S&P 500 index has scratched and clawed its way back above its 50-day moving average. This slight change in trend is a welcome development, but there is a long way to go against a difficult economic backdrop. The Federal Reserve remains on an aggressive tightening path, with inflation staying red-hot in the month of June. Tightening is also starting to take a toll. Recent economic data releases show that the economy is clearly slowing down. 
Stocks have been fighting to draw a line in the sand at current levels. Bond yields have calmed down, the Q2 earnings season has been better than expected, and the potential for tax increases has fallen off the table. Equities have been able to string together a few strong days over the last few weeks, but we are still falling short of the buying intensity often found near market bottoms. We continue to take a cautious approach with the difficult economic landscape. 
Inflation came in at its highest level in decades in the month of June. The 9.1% reading was well above economists’ estimates and raised concerns that inflation is becoming increasingly sticky. The Federal Reserve will likely raise rates by another 75 bps this month and has plans for several more hikes through the balance of the year. Inflation will almost certainly moderate in the month of July with a sharp retreat in gasoline prices but will remain far above the Fed’s target. 
Tightening is far from over, and the economy is starting to show cracks. The services sector has slowed significantly over the last month, and the manufacturing sector has softened as well. Our own models continue to show that a recession is highly likely at some point over the next 12 months. The treasury yield curve is in agreement with the spread between the 10-year and the 2-year sitting in negative territory. 
We continue to emphasize quality in the current landscape. We believe stocks with long histories of dividend growth and experienced management teams remain the best bets for weathering this economic volatility. With yields coming down, the door is also opening for quality growth stocks that have been beaten up this year. We are on the lookout for high-quality growth that may now be trading at a discount.  
Preston May, CBE®
Research Analyst

This report was prepared by Donaldson Capital Management, LLC, a federally registered investment adviser under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. Information in these materials are from sources Donaldson Capital Management, LLC deems reliable, however we do not attest to their accuracy.

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S&P 500: Standard & Poor’s (S&P) 500 Index. The S&P 500 Index is an unmanaged, capitalization-weighted index designed to measure the performance of the broad U.S. economy through changes in the aggregate market value of 500 stocks representing all major industries.