Reflections on the reopening trade, stimulus-driven consumer spending, and the tension between cyclical growth and long-duration assets as rates began their ascent.
From the original report
Selected passages from the original publication. Historical observations reflect the report's publication date, not current market advice.
In the coming weeks, much of the East Coast and Midwest will be visited by Brood X, tens of billions of cicadas that hatch at once every 17 years, like clockwork. For just six weeks, the swarm will emerge to engage in a mating ritual, causing no shortage of commotion, belting out their cry at decibels that compare to a 737 takeoff. Just as such residents will be reminded of this periodic, and easily forgotten certainty, investors have been awoken to the specter of inflation, and cyclicality absent from global economies for decades. The fervor for this prospect has reached in many ways a fever pitch over the past month. The question of whether these factors will burrow away for another 17 years remains to be seen. Over the past few letters, we have debated the question of inflation and bond yields, their corollaries and market effect, and the competing arguments around their persistence. Both Secretary Yellen and Chair Powell have assured us that inflation is likely to be temporary and mitigated by well-entrenched disinflationary factors such as technology, aging, and globalization. Although, we would be remiss not to mention a notable change in forward guidance as inflationary factors have continued to entrench. Supply chains, especially in the industrial complex where supply is least elastic, have become increasingly stressed. Ultimately, the path of such factors beyond the short term remains highly uncertain. However, we remind investors of the folly in the thesis that “this time is different.”
In detail, we have laid out the case for a shift towards more cyclical, inflation-leveraged exposure in portfolios. Violent rotation however is likely to remain in force for markets as growth sectors and those most exposed to duration risk have corrected to levels where opportunity amongst the carnage has emerged. Across both value and growth, expectations for the duration of the cyclical recovery have begun to moderate. Perhaps a harbinger for the months ahead, despite earnings reports that exceeded expectations by an unprecedented degree, each of the Big 6 tech companies, now trades lower than their preprint levels. Fears around durability of this short-lived cycle remain omnipresent.
For educational purposes only; not individualized investment, tax, or legal advice. Investing involves risk, including loss of principal.
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