CPI appears to have topped during November, surprising traders who were underweight both treasuries and equities.
Exhibit 1—CPI Appears to Have Peaked
In fact, on the CPI report date 10- Year U.S. treasury yields fell an astounding 27 basis points to 3.81% as investors concluded that we’ve seen peak rates. In total, 10-Year U.S. treasury yields plunged a whopping 45 basis points (62 from the intra month 4.2% high!) to close out at 3.6% for the month.
Exhibit 2—Bond Yields Fell 45 Basis Points to 3.6% During November
Meanwhile, equity investors concluded that lower rates were beneficial to valuations. Equities jumped 5.4% for the month on the belief that lower rates would support higher valuations.
Exhibit 3—Equities Jumped 5.4% in November
We have likely seen peak CPI. With pessimism high leading up to the October CPI report we were buyers of long duration treasuries (the longer the duration, the larger the price movement for each 1% change in yield) and equities. This was a significant change in view for us. But we knew inflation was close to its peak. And given investors negative sentiment and positioning, the time seemed right for change. And change it did!
This does not mean that we’re out of the woods though. While inflation has likely peaked, rates could creep higher as the Fed ensures inflation does not remain persistent. Furthermore, monetary policy acts with long and variable lags and the increase in Fed Funds during 2022 is unprecedented. We believe there may be another shoe to drop in the form of corporate earnings decreases.
That said, there is likely (more) opportunity in fixed income. Our initial belief that drove the increased treasury and duration exposure during September and October remains the same. There are two ways to win: Either the Fed overtightens and causes a recession, or inflation decelerates. In either case, rates drop, and treasury prices increase. Thus, our increase in treasury exposure.
We expect continued volatility through the end of the year and 1H23. But the path is becoming clearer, and we like our positioning. To date, economic and financial results have largely tracked our views. Should our outlook prove correct there is more opportunity to come in equities as well.
Are you interested in making portfolio changes or getting a more in-depth analysis? Contact Stableford today by calling 480.493.2300 or simply request a copy of our Market Blast.
This market commentary was written and produced by Stableford Capital, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested in directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
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