The Lookout | Week of April 18, 2022

The Lookout | Week of April 18, 2022

This week we’re featuring insights from Simon Lack and his team at SL Advisors, and Joe Tigay of Equity Armor Investments in this edition of The Lookout. 

Also ahead this week on Catalyst Insights, Hunter Frey of Catalyst/Rational will be sharing a post on how investors can weather current market volatility with tactical investments across asset classes, the team at HANDLS Indexes will share their thoughts on navigating the next steps of the Federal Reserve, and much more.

Major Market Events: 

Wednesday, April 20: US Crude Oil Inventories, US Existing Home Sales

Thursday, April 21:   US Initial Jobless Claims, Philadelphia Fed Manufacturing Index, Fed Chair Powell, BoE Gov Bailey, and ECB President Lagarde Speeches

Friday, April 22: BoE Gov Bailey, and ECB President Lagarde Speeches 

Simon Lack, SL Advisors, and Portfolio Manager of an energy infrastructure fund

  • Revamped European energy policy has provided support for the energy sector at a time when inflation expectations have remained surprisingly well constrained. Ten-year inflation as derived from the treasury market moved from 2.5% to just below 3% by early March but has remained there ever since. Real yields have been moving higher – meaning they are less negative – as the market has begun to price in Quantitative Tightening (QT).
  • Expect more discussion in minutes and elsewhere about what the Fed can do to push up long term rates. It’s a task made more difficult by negative real yields – a persistent gift from return-insensitive investors to America, that nonetheless mutes the transmission mechanism from the Fed Funds rate to bond yields.
  • If the Fed opts to shrink their balance sheet more aggressively, by for example auctioning off some of their holdings of mortgage-backed securities, the resulting increase in bond yields would mitigate some of the need to drive up short-term rates.

Joe Tigay, Equity Armor Investments, Portfolio Manager of a volatility-hedged equity fund.

  • Bonds and equities are still positively correlated. It seems the market expects the Fed to put in place another quantitative easing program if the economy cools off. But for that to happen, inflation, which is still running hotter than expected, would need to rapidly come down.
  • There’s uncertainty surrounding the next Fed decision. They could be much more aggressive which has the potential to take the world economy into a global recession to pop commodity prices.
  • It’s our belief that consumers are far better capitalized to handle a recession and it would likely be short lived and better than the alternative of runaway inflation.

Thank you for reading The Lookout. Come back next Monday for more insights on what investors can expect in the markets.

 

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