By Michael Carlisle, Vice President & Investment Committee Chair

As we come to the end of Q2 the calendar reminds us that mid-year has arrived and the outlook for economic activity and financial markets shifts to

the possible path forward into year-end. Many market pundits describe their second half market outlook with such phrases as “Goldilocks,” “optimal” and “constructive.”

There are several reasons for their positive view of the economy and markets into year-end:

• historic low interest rates• increasing economic activity from

the lifting of COVID lockdowns• historic levels of consumer

savings• the Federal Reserve’s massive

liquidity policy • the unprecedented fiscal stimulus

from Congress

Estimates of full year US GDP now cluster around 7%, a level not seen for decades and on par with that of China. Such levels of growth will naturally augur for increased corporate earnings, profits, and a healthy market multiple on those earnings. What might be some storm clouds on the horizon? There are all kinds of “known unknowns” that could provide exogenous shocks to the financial markets, but the two that would be most concerning are:

1. Inflation expectations becoming anchored, forcing the Fed to change policy much sooner than its announced plans to do so;

INVESTMENT & WEALTH MANAGEMENT

UPDATEJULY 9, 2021

2021 SECOND QUARTER MARKET REVIEW

SECOND QUARTER – 2021

IN THIS ISSUE

2021 Second Quarter Market Review 1-2

Q2 Market Performance Chart 2

Contact Us 2

New Arrivals 2

Historical Perspective on Inflation 3

Company News 4

Continued on p. 2

Teamwork in action at our Manhattan office.

SECOND QUARTER MARKET REVIEW, CONTINUED

800 Poyntz Ave., P.O. Box 1806Manhattan, KS 66505

785.537.7200

4210 Philips Farm Road, Suite 109Columbia, MO 65201

573.876.7000

333 West 9th Street, Suite ALawrence, KS 66044

785.371.9555

908 Broadway, Suite BMarysville, KS 66508

785.562.2344

THETRUSTCO.COM800.285.7878

CONTACT US

2. Geo-political tensions with China that push either country into reactionary confrontations/policies that could lead to unexpected adverse encounters—the so called “Thucydides’ Trap.”

Trying to handicap the events that could trigger such confrontations with China is a complex, multi-dimensional task beyond the scope of this brief narrative, but the probability of some such event(s) within the next five years is probably higher than many would care to admit.

The first concern over inflation expectations has begun to show itself in the market reaction to April and May CPI and Core CPI data. Both monthly changes in inflation readings resulted in year-over-year increases in inflation not seen for many years. At the recent Fed meeting (June 15-16) there were no surprises; rates did not change and neither did QE (bond buying) levels. However, a noticeable shift toward concerns over

recent inflation data was expressed by some Fed members, and this has since dominated market trading and will likely do so for the coming months, as rate hike(s) in 2022 are now broadly seen as a possibility. The Fed is “beginning to talk about-talking about” a change in policy, and at a slightly faster pace than Chairman Powell would desire.

So, as we move toward year-end, Fed meetings and their resulting commentary will set the tone for the markets, notwithstanding the support from strong economic growth. If there was any doubt the recent strength in financial markets was dependent on accommodative monetary policy, the June FOMC meeting should dispel any such notions.

NEW ARRIVALS!

Story Portlynn (right) was born to Tennille & Michael Lester on May 17. Dylan and Brooks (below) were welcomed by Cole & Bailey Bachamp on May 13.

3

HISTORICAL PERSPECTIVE ON INFLATION

Mark Knackendoffel, CEOWe have always considered the impact of inflation in our decision processes, but over the past 35 years, inflationary pressures have been declining. However, our concern has increased recently, and we’ve had quite a few questions from clients about our posture amid the recent inflationary environment.

So, I want to share some history and observations from one our favorite economists, Brian Wesbury, Chief Economist for First Trust Advisors, a firm we admire, but have not used. Mr. Wesbury published the following essay on June 1, 2021.

An opinion leader from the New York Times recently tweeted:

“Looking back, what’s all the fuss about inflation in the 1970s? It wasn’t “that high,” and so the risk of returning to that kind of inflation should not be a serious concern today, because it wouldn’t even be that bad if we went back there.”

Just so we get our facts straight, here are the consumer price inflation rates by decade.

So, while the US in the 1970s and early 1980s was not Zimbabwe, it was the worst sustained inflation in US history. Prices were doubling every 10 years and the Fed had to push interest rates up to 20% to stop the damage.

Nonetheless, the “revisionists” say that the inflation of the 1970s was good for many people. They argue that home ownership rose, student debt got wiped out, and inflation reduced the value of the national debt. In other words, if you can see these benefits, why don’t we do it again?

First, it is true that home ownership rose in the 1970s, but it was rising even faster in the second half of the

1960s. Moreover, Savings & Loans provided assumable mortgages in the 1970s, which allowed buyers to assume sellers’ lower, pre-inflation mortgage rate. Eventually, this led to the collapse of the Savings & Loan Industry.

Second, because student debt has fixed interest rates, of course it would disappear faster with higher inflation. In addition, people with student debt tend to have higher lifetime incomes than people without that debt. Is he really arguing in favor of using inflation to redistribute wealth to people with above-average lifetime incomes?

Third, the national debt did fall as a share of GDP after World War II. But almost all of the decline happened between 1946, when debt was 118% of GDP, and 1969 when it fell to 36%. It only fell another 4

percentage points of GDP, to 32%, by 1981. And from 1946 through 1969, inflation averaged 2.5% per year. In other words, the inflation of the 1970s was not the key behind reducing the national debt.

Here’s what the 1970s-inflation apologists don’t say: unemployment averaged 4.6% in the 1950s and 1960s then averaged 6.2% in the 1970s. It was even higher in the 1980s, but that’s because the early part of the decade had to be

dedicated to a tight monetary policy to wrestle inflation under control.

Ultimately, inflation is a “hidden” tax that doesn’t stay hidden. People adapt by redirecting resources away from production and toward inflation-hedging, which doesn’t raise standards of living over time.

The problem is, at this point, you have to be relatively old to remember the 1970s. With each passing year, a smaller share of the population actually lived through it. And so we forget the pain it caused. Hopefully, we are not condemned to repeat it.

1950s 2.2%1960s 2.5%1970s 7.4%1980s 5.1%

1990s 2.9%2000s 2.6%2010s 1.7%

Some content may be prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2021

DISCLOSURES —Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

INVESTMENT MANAGEMENT

FINANCIAL PLANNING

RETIREMENT PLANS

TRUST ADMINISTRATION

THETRUSTCO.COM800.285.7878

WELCOME, NEW STAFF!

SHELLEY CARVERTrust Officer & Wealth Advisor, Manhattan Shelley most recently served five years as a major gift Development Officer for the College of Arts & Sciences at the Kansas State University Foundation. She holds a Master of Public Administration degree from Kansas State University and a bachelor’s in business administration from the Albers School of Business and Economics at Seattle University.

KALE TERRILLAssociate Trust Officer & Wealth Advisor,

ManhattanKale earned his MBA with a specialization in Finance

at the University of Nebraska – Lincoln while also working on the UNL Athletics Event Management team. He’s originally from Smith Center, KS, and is

proudly following in his father’s footsteps with a career in wealth management.

CHRIS HUNTERAssociate Trust Officer & Wealth Advisor,

ManhattanChris holds a B.S. in Business Administration/

Marketing from Kansas State University. Prior to joining The Trust Company, he served as Assistant

Vice President & Branch Manager at UMB Bank in Manhattan. He grew up in southeast Kansas, where his

father also enjoyed a career in the financial industry.

AMANDA RINIKERAccount Administrator, ManhattanAmanda joined us with more than 10 years of experience in the financial sector and a Bachelor of Science in Communications Studies from the University of Kansas. After many years in the Lawrence and Kansas City areas, she was eager to move back home to Wamego to be near family and friends. We’re glad she did!

GRANT KOHLMEIERAssociate Trading Analyst, ManhattanIn this newly developed role, Grant is the liaison between Investment Management, Operations and Account Administration. He is responsible for ensuring accuracy of trades and transfers and performing routine reviews to ensure client accounts remain properly allocated to their investment targets. He is a lifelong Manhattan resident and K-State graduate.