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Cliff’s Notes: Jackson Hole Confirms: It is Still a Macro-Driven Market and Inflation is in the Driver's Seat

A Quick Note on the Markets Following the Fed Jackson Hole Summit and Our Thoughts on Investment Strategy

Still a Macro-Driven Market, Inflation Remains in the Driver’s Seat

The much-anticipated speech by Fed Chairman Powell delivered a strong hawkish message against inflation, and made clear his top priority is fighting inflation, and preparing us for more economic pain — to quote, “The Fed will have to call the shots as we see them.” This quote was not uttered today, but in 1979 by Fed Chairman Paul Volcker. During today’s Jackson Hole Summit speech, Chairman Powell channeled a bit of Volcker with phrases such as the fight against inflation will “bring some pain to households and businesses.” He also spoke to their unequivocal commitment to more restrictive Fed policy. This language ups the ante on where the Fed takes rates.

Recall, only a few weeks back the Fed was talking about “getting the Funds rate to neutral, stopping and looking around.” The newly added emphasis on heading toward a restrictive policy means the Fed’s concern over embedded inflation and its future path continues to grow. Yes, inflation may have peaked and will come down, but the path of the decline and where it bottoms are the critical questions today. It will take more than a topical application of rate increases to knock the tall weed of inflation down to the Fed’s goal of 2%. Our thought is that while CPI (Consumer Price Index) took the elevator up to a peak of 9.1%, inflation will take more of an escalator ride on its way down and could have difficulty reaching the Fed’s 2% goal in this cycle. Therefore, it strikes us that the recent rally in stocks (with the S&P up 9% in July alone) and shift back in leadership toward long-duration growth stocks, should not be viewed as a sign of victory against what is a long-term regime change evidenced by sticky and persistent inflation and a Fed that may have no choice but to keep an elevated interest rate environment for not only this year but well into 2023.

The recent stock and bond rally seemed to be based on a belief that the Fed could slow the economy to a level just right to keep the economy from a hard landing and at the same time allow for a “pivot” toward lower rates in early to mid-2023. The Jackson Hole comments clearly “push out the pivot” quite a ways. With Fed Funds at 2.25%–2.5% and inflation running above 8.5%, the Fed Funds rate is still deeply in negative real rate territory. Even the perennially dovish Fed Governor Neel Kashkari joined the hawkish bandwagon this week and said his biggest worry is that inflation becomes “more embedded” in expectations.

Investment Implications

As we have said, we would not be surprised to see the recent market bounce give more ground given our view (and we think Jackson Hole confirms that view) that inflation will come down but remain elevated and pernicious well into 2023.

We think the bounce gives a chance for investors to capture some of the rebound by taking gains and repositioning portfolios toward more optimal outcomes.

Viewed through the lens of a Regime Change driven by inflation, we would continue to be cautious on long-duration assets in both equities and fixed income. We suggest seeking out sectors that are quality focused (in the face of a slowing economy), income generating (for predictability of returns) and investments that benefit from this inflationary environment such as energy, commodities and select real estate. In fixed income we still favor higher quality credit over duration. The silver lining of a near tripling of yields in short to intermediate maturities is that the margin of safety against higher rates is much larger and cash (shorter duration) is no longer trash. Areas such as shorter-duration investment grade and upper quality high yield make sense as well as bank loans where one “unfixes their fixed income.” Shorter duration preferreds also have the potential to provide both income and defensiveness against rates.

Given the recent bounce, we think this may prove a good time to take gains and reposition portfolios to better future proof against the environment evolving in the era of “data dependency” and against the backdrop of a lengthy Regime Change.

CRN: 2022-0805-10239 R

This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at commentary-disclosures. For additional commentary or financial resources, please visit


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