The Lookout | Week of February 14, 2022

The Lookout | Week of February 14, 2022

Read below for what our network of investment professionals has their eyes on in the coming week in this week’s edition of The Lookout.

Major Market Events:

Tuesday, February 15: US Producer Price Index Data Release

Wednesday, February 16: Crude Oil Inventories (US), FOMC Meeting Minutes (US)

Thursday, February 17: Initial Jobless Claims (US)

Hunter Frey, Analyst at Catalyst Funds, Rational Funds, and Strategy Shares:

• Amid a 40-year high inflation rate of 7.5%, geopolitical tensions, and persistent supply bottlenecks, U.S. Treasury yields across the curve continue to rise as the risk of a higher velocity of Fed monetary tightening looms. As Treasury yields continue to increase, equities will likely remain volatile and the bonds with higher convexity risk are likely to experience muted performance.
• Looking back to our 2022 Outlook, we forecasted that the 10-Year Treasury Yield will be between 1.75% – 2.15%, and the 30-Year Treasury Yield will be between 2.25% -2.65%. Currently, both of our forecasts are in-line with the 10-year Treasury, residing at approximately 2.01% (up approx. 32.94% since 12/31/21) and the 30-Year Treasury residing at approximately 2.31% (up approx. 21.31% since 12/31/21). As the current economic situation endures (with inflation trending higher and supply constraints persisting) the Fed’s monetary tightening guidance will likely continue to be the most impactful catalyst for equity and bond markets in the near-term.
• To weather some of the overshadowing macro risks, investors should remain nimble in equity markets with a heavier weight in small cap value and cyclicals and a preference for domestic equities over international equities. Amid interest rate hikes and the potential for a front-loaded tightening policy, bond investors should minimize exposure to highly convex securities and reallocate investments into cyclical corporate bonds, corporate debt with robust balance sheets, floating rate securities (bank loans), and low correlated investments (non-agency residential mortgage-backed securities).

Eric Clark, Accuvest Global Advisors, and portfolio manager of a consumer-oriented fund

• Inflation continues to be the topic of the day (and rightfully so), but it’s important to remember, it’s the rate of change (ROC) that matters most.
• Over the next few months, big base effects will likely roll off, which will result in the U.S. peak inflation cycle being sometime in Q1.
• With economic pressure and inflation easing, the Fed will have significant air cover to walk back many of their aggressive rate hike and quantitative tightening programs. Current market positioning is heavily skewed towards a worst-case scenario. Anything less than this base case could result in a powerful re-risking into stocks.

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

• The ongoing threat of a Russian invasion of Ukraine continues to weigh on European supplies of natural gas, which are being supplemented by increased U.S. exports of LNG.
• Last week’s strong CPI report provided further support for the pipeline sector’s outperformance of the S&P500.
• Plains GP and Enbridge released their report earnings this past week with results supporting maximization of free cash flow, reduced absolute levels of debt, and optimization of sustainability efforts.

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

• As geopolitical risks mount, and some are saying the market is underestimating a risk of war, the VIX is near 30, a sign that Ukraine has the full attention of VOL traders.
• Stocks remain below key technical levels, and while the focus has been on Ukraine, even if that were not on the table the market has some shakiness to it.  We are watching High Yield debt closely, and it’s starting to deteriorate as the Fed is getting closer to ending its asset purchases.
• As VIX traders, we always watch the credit markets first as a gauge of liquidity and economic conditions.

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