As 2022 ended, many capital market participants gladly said adieu. It was a year of horrid returns for traditional portfolios, a stellar year for alternative strategies, and possibly the year that forced regulatory agencies to get more serious about their oversight of the digital investment arena after a string of historic thefts, alleged frauds, and bankruptcies.  Inflation remained quite high at 7.1% (CPI YoY) but continued its downward trajectory in the 4th quarter. Risk assets rallied on the hopes that the Federal Reserve (the “Fed”) was nearing the end of its tightening cycle.  Mortgage rates moved below 7% but are still at levels not seen in over a decade.  Concluding that peak inflation is in the rearview mirror presumes many things: well behaved energy markets, resolute Central Banks, less international strife, reasonable environmental regulations, and disciplined government spending. None of these can be taken for granted or even considered probable, in our opinion.  

Investor focus seems to have shifted from inflation as a juggernaut to how soon the Fed’s pivot on interest rates will come and flash the “all clear” to go all in on risk.  The Fed has repeatedly said high rates are here to stay for quite some time and they will not be cutting in 2023.  In our view, the long end of the U.S. Treasury market and the outsized positive moves of equities in response to softening economic data convey that the markets don’t believe the narrative and think sooner than later, the Fed will fall back on their old ways of priming the economy with easy money.  Inflation still exceeds growth in the U.S. by a wide margin, only a robust job market prevents classifying the current economic environment as solidly stagflationary.    

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