As noted by others, most especially for the Fed’s forecasts, the combination of inflation dropping neatly over the near term (6 quarters ahead)…

…and rates moving aggressively higher…

…with the unemployment rate remaining effectively flat is…

…well, quite optimistic!

This is essentially the market quite explicitly forecasting a “soft-landing”. If that proves right, the market is probably correctly valued.

If wrong, it isn’t. So, how do things go wrong? Well, the Fed overtightens, financial conditions slow, earnings turn and the market likely does quite poorly.

Despite the above sentence sounding a little bearish, and the overall point of the note sounding sceptical that the Fed can do it, thus far, no mistake is made. It depends entirely on what the follow-through looks like.

So, in international equities, we are sitting close on our strategic weight, having bought ~4% of the portfolio at various points of dislocation (e.g. European equities as they dropped in late Feb/early March on the back of the Russian invasion of Ukraine) and, should shares continue to recover (i.e. progressing the past week’s worth of strong rally) we would likely trim those purchases back, as the risk-reward focus would return to just how likely is this soft landing.

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