The Lookout | Week of January 24, 2022

The Lookout | Week of January 24, 2022

This week, we’re proud to introduce The Lookout, which highlights insights from across the team of portfolio managers in our network. This new weekly piece will be posted on Mondays (other than on holidays) right here on Catalyst-Insights.com.

Major Market Events:

Wednesday, January 26: FOMC Meeting, Press Conference

Insights from Leland Abrams, Wynkoop LLC, Fixed Income Fund Manager

• As we look to the markets after a volatile week, we’re beginning to see signs of a downturn, including a flattening yield curve and the recent crypto/tech selloff. The increasing wealth effect that we’re seeing can quickly have implications on the demand side of things, but we believe the supply side will fix itself, hopefully after this Omicron sweep.
• On inflation, we believe it is at or near the top of where we’ll see it go, and it has already rounded the corner, so to speak.
• We see a lid on the long end of the yield curve and our team has been favoring buying from overseas as the U.S. has been more hawkish than other countries. Future growth prospects may be dwindling in light of rising rates, leading to a flatter/inverted yield curve.

Insights from Joseph Tigay, Equity Armor, Portfolio Manager of an equity volatility focused fund

• Given the Fed is set to meet this week, we’ll begin with the FOMC. We see the “Fed Put” as being eliminated after it has provided a tremendous amount of support since the Great Recession – accommodating markets nearly every time there was the hint of a selloff in equities. With inflation at 40-year highs, it seems the market can no longer count on the Fed stepping in and preventing a bear market. However, this could be even trickier than at first glance.
• While the Fed has maintained that they are serious about getting inflation under control, the market is showing signs that it does not believe the Fed when they say they are going to put inflation ahead of equities. It’s our belief that the result will likely be a higher baseline for volatility.
• In an inflationary environment, where the “cleanest shirt in the world” is U.S. equities, investors will need to stay in the market. While we are most concerned about the risk of a 40% decline in equities, we also know that there is risk to being in cash when inflation is running at 7%, and equities could continue higher with everything else priced in dollars. We see volatility continuing to be a pure negatively correlated hedge to these risks.