State of play

Macro market movements are still very consistent with monetary policy tightening.

We see the flattening of the yield curve, short rates moving up (in anticipation of actual rate hikes, with March 2022 now looking “live”), spreads widening and commodities + equities peaking.

It’s important to note that it is normally very profitable to “fight the Fed”, staying overweight risky assets as we approach “lift off”, and equity markets often stay quite strong for the first few hikes.

Hence the old traders joke that “the time to worry is when they stop raising rates”, rather than when they start.

Usually, the Fed is behind the curve, and when they begin to hike it reflects the buoyant economy and strong profit environment, and R* (the magical natural rate of interest) is both rising and higher than the actual interest rate, as such policy is in fact getting progressively looser.

When they begin to cut, they are again behind the curve, and that conditions have already slowed, and the Fed is now following R* (the magical natural rate of interest) down, such that policy gets progressively tighter even as they lower the cash rate.

In today’s environment, we think this pattern is broadly true once again, however the unusually high starting valuation of markets, and pockets of distinct (indeed obvious) excess, such as the multiples ascribed to secular growth stocks, gives us more pause than normal.

We regard the above analysis as supportive to an ongoing allocation to equities in line with one’s SAA, noting that, at the margin, we maintain a modest DAA tilt underweight, reflecting those rate and valuation concerns.

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