Team “transitory” probably continues to feel pretty good, based on the US CPI print out overnight.
Underlying core momentum was a little higher, enough to give the not-so-transitory something to latch on to, but the key takeaway is the annualised 1m and 3m data, which shows the pace of acceleration has declined markedly.
Our view, aligned to team transitory, has been predicated on the componentry. All of the gains were coming from a relatively narrow set of sectors (new and used vehicles, airlines, hotels), and those, as the below graph shows, are now moderating.
Taper will occur, as it has to, and the US (ex COVID) is strong enough to see higher rates down the track (which is distinctly separate from tapering). We think that’s a meaningful negative to secular growth stocks (tech, fintech, health), and some cyclically high flying sectors (discretionary) where valuations are stretched.
Likewise, that will mean shorter term losses on long duration fixed income securities. As such, we are modestly underweight shares, and bonds, at the diversified portfolio level, with overweights to cash and alternative strategies (equity market neutral, global macro, absolute return via alt risk premia [classic fama french factors]).
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