Chief Investment Officer
Strategas Asset Management Chief Investment Officer Jason Trennert discusses two major themes in the Strategas Macro Thematic Opportunities Fund (NYSE: SAMT): the return of active management and the effects of deglobalization
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No Surprise The Fed Is Still Tightening
With inflation proving to be stickier as it moves into "Core" items, the case for further rate hikes is made stronger. It has been our view for sometime that the The Federal Reserve (“Fed”) will continue to raise rates as it attempts to reign in inflation and while we believe the Fed will have to pivot at some point, history shows the The Fed's, Federal Funds Rate (“Fed Funds Rate”) exceeds the Consumer Price Index (“CPI”) rate before a rate-hiking cycle concludes. There remains a view that underlying economic growth could deteriorate quickly from tighter financial conditions and the Fed could be forced to "pivot", returning policy to an easy stance before inflation returns to their 2% target but with the labor market hanging in up untill now, there remains breathing room.
Source: Bloomberg 10/27/2022
Balance Sheet Run Off Still In The Early Stages
The scheduled run-off in the size of the assets on the Fed’s balance sheet to the tune of $95 billion a month is in the very early stages of draining the $5 trillion in excess liquidity pumped into the economic system since the pandemic began. While there is a wide array of data on the impact of Fed tightening via more conventional means, neither the central bank nor investors have much of a historical context for Quantitative Tightening (“Q.T”), caution remains warranted.
Companies Not Reliant On External Financing Are Attractive
We continue to believe there is an opportunity to invest in companies that are able to weather tighter financial conditions and specifically, like those that are able to be self-funding. Those business whose operations are generating strong free cash flow, reducing capital expenditures and have already extended their debt maturities during the ultra low rate environment, should stand to benefit. As the competition for capital rises, corporations will now have to evaluate their capital structures more so than at any point over the last 10-years. The debt binge that took place during the quantitative easing environment is coming to an end.
This represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the fund or any security in particular. This research is provided for educational purposes only. Strategas claims no responsibility for its accuracy or the reliability of the data provided. This information is not intended to provide legal and/or tax advice. Please consult your financial advisor for further information.
In our recently published Market Outlook, we discussed our belief on how inflation, which began to rear its ugly head in early 2021, would remain with us longer than most believed. While the Federal Reserve prophesized at first that the data was merely transitory, our belief that inflation would remain stickier for longer, led us to incorporate our Inflation for Longer premise as one of the four original themes upon launch of our Strategas Macro Thematic Opportunities ETF (NYSE: SAMT)
As we continue to move through the Fall, inflation data thus far shown signs of peaking. However, the data is not close to being suggestive of providing signs of the substantial relief the Fed and consumers alike are hoping for. Our Chief Economist, Don Rissmiller, notes that while headline Consumer Price Index (CPI) in the U.S. surprised on the upside for September, it was not a blowout number. The year over year core CPI number is still moving higher despite headline CPI moving in the opposite direction. But Don notes that the rent component of CPI is a slow-moving number within the CPI calculation and could take some time to roll over from peak levels. He further comments that rent inflation for new tenants tends to lead the official Bureau of Labor Statistics (BLS) rent inflation by 4 quarters. A cursory review the chart below does show the components and full CPI off its recent highs but still at extremely elevated levels.
US Year of Year (Y/Y) Consumer Price Index (CPI) Breakdown
Further down the inflation pipeline, Don notes that Producer Price Index (PPI) prices here are easing. Import prices have come down and U.S. small businesses have reported less price pressure in the latest National Federation of Independent Business (NFIB) survey. Some retailers even look to have over-stocked inventory on the dip in prices and freight rates have also declined notably.
Expectations have also begun to rein in a bit as inflation numbers 12 months out have come down off their recent extreme reading which last approached 8% in June.
However, even as prices of items which hit closer to home for many consumers - the price of gasoline for example – has shown signs of abating, it still has not significantly moved off its recent highs.
Nor has the overall personal expenditure price composite moved significantly lower, suggesting the Fed’s policies of aggressive rate hikes still has not made a significant dent in overall inflation.