The Lookout | Week of March 21, 2022

The Lookout | Week of March 21, 2022

Hunter Frey of Catalyst and Simon Lack and his team at SL Advisors provide commentary on what markets might expect in the week ahead in this edition of The Lookout.

Major Market Events:

Tuesday, March 22: ECB President Lagarde Speaks

Wednesday, March 23: Fed Chair Powell Speaks, US New Home Sales Data, US Crude Oil Inventories

Thursday, March 24:  EU Leaders Summit, US Core Durable Goods Orders, US Initial Jobless Claims

Friday, March 25: EU Leaders Summit, US Pending Home Sales Data

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

• Equities remain poised for a volatile week after the S&P 500 Index experienced one of the best weeks since November 2020. As stagflation persists and geopolitical uncertain continues, equities will likely remain volatile especially amid Federal Reserve Chair Jerome Powell’s hawkish comments regarding interest rate hikes. Stocks trading at a relative value and cyclical sectors remain the best equities to generate alpha and mitigate macroeconomic headwinds.
• Commodity markets continue to support the commodity “supercycle” forecast we published back in March of 2021 (“Are Commodities on the Brink of a “Supercycle”?). Opportunistic soft commodities remain attractive as upside generation has been compressed since the Russia-Ukraine war. Hard commodity volatility has started to normalize, though macroeconomic and geopolitical headwinds remain a risk. Hard assets such as farmland and gold can help diversify portfolios to weather inflationary pressures.
• Fixed income markets also remain volatile as the Fed’s rate hike trajectory and the potential for a higher velocity of quantitative tightening (more hawkish path to tame inflation) resurface. The bear steepening of the yield curve and the historical forecasts of a flatter yield curve may potentially foreshadow the market’s recessionary fears. Therefore, shorter duration bonds, floating rate bonds, and uncorrelated fixed income asset classes (such as non-agency RMBS) remain the best fixed income investments to weather macro and monetary policy risks.

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

• The FOMC revised up their forecasts of short-term rates (the “dot plot”) by 1% over the next couple of years. They’re also now projecting they’ll need to raise rates above neutral before reducing them. In this respect they are belatedly confirming the forecast of the Eurodollar futures market.
• Although today’s high inflation is partly due to the Fed misinterpreting deep-seated as transitory, it’s also a consequence of their increased tolerance for elevated inflation in order to maximize employment. Any setback in employment will likely create a dilemma.

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