SUMMARY
The Fed last week told investors it would tighten policy cautiously as the economy recovers. We continue to look for further gains for a narrowing subset of cyclical assets and modestly higher interest rates.
Investment strategy
June 20, 2021
Really listening to Jerome Powell
June 20, 2021
- Despite obvious progress toward the Federal Reserve’s goals, markets were less-than-fully prepared for the Fed Chair’s comments that the central bank wouldn’t continue crisis-period monetary policy indefinitely.
- Across asset classes, “inflation trades” were set back last week. Gold fell 6.2%, copper declined 8.4% and oil steadied. In the case of industrial metals and energy, the losses were small compared to the scope of year-to-date gains (+18% for copper).
- Strong investor inflows into cyclical recovery opportunities left them vulnerable to the merest acknowledgement of a “responsible Fed.” Profit-taking and repositioning were evident already before the Fed’s meeting. The absence of long-term rate pressures helped growth/tech shares, which rose slightly.
- Amid a complex Fed message and muddled market response, investors need to see the big picture: 1) Supply shortages that have driven inflation spikes are generally not long-term growth opportunities. 2) “Slowing the pace of Fed easing” won’t cause economic collapse. 3) Central banks will “stay easy” by the standard of past decades. This doesn’t mean they will allow inflation to accelerate without bound.
- As discussed in our Mid-Year Outlook a fully reopened world economy still suggests sharp rebounds in the most COVID-impacted industries and regions. This suggests further gains for a narrowing subset of cyclical assets. It also suggests modestly higher interest rates.
- The economy will also differ significantly from the pre-COVID period, with a much larger “digital” base and investors shouldn’t shun enduring growth opportunities.
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