Rising Inflation Expectations Drive Investors Out Of Risk Assets!By Mitchell Anthony
July 8, 2022
While inflation has been running hot for over 1 ½ years, investors and the central bank have not believed that the inflation was entrenched and hence inflation expectations stayed relatively low until recently. Over the last 3 to 4 months that position has changed significantly and as a result investors hit the sell button in a dramatic manner last quarter. Risk assets of all types had double digit losses in Q2. Stocks, REITs, Treasuries, Corporate Bonds, Junk Bonds, and Commodities all swooned with the worst losses occurring in high PE stocks and real estate investment trusts. Both of these were down 25 to 30% in Q2. MACM’s dynamic growth portfolio lost over 16% despite a double digit cash position. Clearly we have a new hawkish position from the Fed that combined with investors armed with knowledge of how stocks and risk assets perform during periods of high inflation, combined to drive investors out of risk assets and into cash. Even ultrashort term bond funds lost money in Q2!
The Fed’s new resolve to kill inflation all but ensure that a recession will take place this year and maybe into 2023. The uncertainty of what a recession might do to the current themes of consumption in the globe has caused extreme volatility in risk assets. The US economy has been driven by four strong consumption themes for the last several years. These themes include: housing and related durable goods, the buildout of cloud computing infrastructure, consumers desire to convert to electric vehicles, and consumers pent up demand for experiences. The sustainability of these mostly secular growth themes has now been questioned by investors and will continue to be questioned until more visibility is available causing further volatility in risk markets.Read more
