• As inflation risks remain high, as supply chain setbacks have been somewhat worse than expected, as the Omicron wave in China led to a renewed and dramatic tightening of virus-related restrictions and as the Russian invasion of Ukraine has led to sharp increases in food, energy and metals prices, the market has been leaning toward a more aggressive monetary normalization process, the market has been leaning toward a more aggressive process of monetary normalization than that set out by the Fed than the one set by the Fed just a few weeks ago or, in other words, the guidance for the next 2 years.In other words, the guidance for the next 2 years for the federal funds rate (2.8%) could end up being brought forward almost completely for this year.
• Of course, this is putting additional pressure on market rates, with the 2-year treasury trading above 2.6% and 10-year rates near 3.0%.
• While risks remain, in principle we are inclined to believe that prime rates are already reaching a "relevant maximum level" (not necessarily the end of this rate adjustment cycle, but a pause and some reversion seems reasonable) as several divergences that we observed in previous months, between the level of rates and inflation levels, as well as real rates that were very low compared to other adjustment cycles, have been closing.
• While the 10y2y yield curve has briefly inverted other measures of the curve remain positive (10y3m). These measures reflect that the market expects the Fed to raise the federal funds rate in the next year and a half, which would not be consistent with an impending recession.
• The time between inversion and recession can be long. The S&P 500 has risen after yield curve inversions, on average, 15%.
• In terms of strategy, we maintain a still-risk-friendly view and recent adjustments provide better entry points in tactical terms. and recent adjustments provide better entry points in tactical terms. We continue to recommend OW in equities and commodities and UW in bonds, although rate levels already look "more attractive", especially in IG and after a drop of more than 15% from 4Q21 highs, IG US debt may well represent a "tactical opportunity", within a diversified portfolio and a Barbell strategy.
• Prior to the Ukraine war, growth was expected to accelerate well above trend as we reopen from the Omicron wave and see an unleashing of pent-up consumer and business demand. Although the growth outlook has been downgraded over the past few weeks, much of this momentum remains and we still see support from strong labor markets, light investor positioning, healthy corporate and consumer balance sheets, easing policy in China and fiscal support in several countries to offset some of the drag from high energy prices.
• We continue to have a bias towards value sectors, which are more indexed to the "real economy", sensitive to higher inflation, "short duration" and therefore less sensitive to higher interest rates.
• With recession risks still limited, we see opportunities in the Small Cap segments.
• Finally, we recommend selectivity in growth sectors that are more sensitive to higher interest rates. Software multiples are now close to pre-pandemic levels. However, growth expectations remain stable. Multiples have contracted while rates are still relatively consistent with levels seen during the most recent prior peak (2018).

For more details and investment opportunities, please see the attached report..

Humberto Mora

Assistant Investment Manager Finance and Business Finance and Business Brokerage Firm