Market expectations were that Powell's message in Jackson Hole would reaffirm a moderate shift in monetary policy and nothing of the sort occurred. The underlying logic of expecting a "Fed pivot" was that the focus of monetary policy would shift from inflation to growth, but in his speech the Fed Chairman promised to do what was necessary to rid the economy of too high inflation.

"The reduction in inflation is likely to require a sustained period of below-trend growth.", Powell noted. "In addition, there is very likely to be some weakening of labor market condil", which otherwise remains categorized as "particularly strong" and "clearly unbalanced". On the other hand, that the demand for workers substantially exceeded supply, which has led to rapid wage increases that are incompatible with the inflation target. incompatible with the Fed's 2% inflation target..

But probably what was most striking about his speech was when Powell pointed out that the pain that businesses and households will have to endure is preferable to the Fed not restoring price stability now and having to inflict even more damage on the economy later on. To be sure, we share that diagnosis, but it also has an implicit asset-unfriendly message: "Don't expect the Fed to prop up the market this time," at least not without first feeling "more pain" (the S&P 500 has already lost nearly 7% since Jackson Hole).

Without a monetary policy "pivot", economic activity will necessarily continue to slow, as the Fed's objective is to reduce inflation by slowing growth below its potential, thereby increasing the risks of recession.The Fed's objective is to reduce inflation by slowing growth below potential, thereby increasing the risks of recession.

What does all this mean in terms of asset management?

So far most of the market weakness has been due to the Fed and tighter financial conditions. Higher interest rates have squeezed equity valuations, especially in the higher implied growth sectors, and have produced heavy losses in the fixed income markets as well, especially those with longer duration. We still see some downside to this, as the Fed's target would be to bring policy rates to something closer to 4%, which is not fully incorporated in asset prices.

For equities, the pre-Jackson Hole rally drove valuations to unrealistic levels. While aggregate P/E multiples have come back down, they do not look particularly attractive for the story (average levels), and there is still some divergence from interest rate levels (see Chart #1 and #2).

Chart N°1and N°2. S&P500: we still see a downside to valuations given the higher interest rates.

Source: Fynsa Strategy, Bloomberg

But as growth prospects begin to weaken, the focus should shift from interest rates to corporate earnings, the focus should shift from interest rates to corporate earnings, especially as we enter the weakest seasonal time of the year for earnings revisions.especially as we enter the weakest seasonal time of the year for earnings revisions, and as inflation begins to put further pressure on margins and demand, which should also and demand, which should also put pressure on corporate spreads, which have remained relatively resilient so far (see Figures N°3 and N°4).

Charts N°3 and N°4. S&P 500: Corporate earnings remain positive, but lose momentum. Unfavorable seasonality

Source: Fynsa Strategy, Morgan Stanley

The current context makes it necessary to have a much more selective allocationThe current context requires a much more selective allocation, still with a certain overweight in equities, considering that, historically, equities have shown a relative outperformance in inflationary periods. We recommend maintaining well-diversified portfolios in terms of regions, styles and sectors, more overweight in value sectors, especially energy. Very high quality fixed income (GI) and medium duration portfolios. And finally, consider some cash, which is no longer a major drag on a portfolio's current performance. Here is some data on this: US 6-month Treasury yields (3.3%) are the highest since late 2007 and offer 170 bps more than S&P 500 dividends (today at 1.6%), 18 bps more than 10-year US Treasuries (today at 3.15%) and only 60 bps less than the US aggregate bond index (3.91% YTM).