Today's Inflation Data Was Challenging; How We're Positioning

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Today's inflation data was challenging. The May consumer price index (CPI) showed that in the U.S. prices surged to a 40-year high. This news dashed hopes and some investor expectations that inflation would moderate after the Federal Reserve began tightening.

In a previous note, I said that I believe that the market will bottom out when inflation peaks. While I still expect that to be the case, it's clear that the Federal Reserve still has a lot of work to do to rein inflation in. Accordingly, interest rate swaps market prices are now implying three 50bp Fed rate hikes in June, July and September, vs. previous expectations for a moderation in rate hikes in September. At next week’s FOMC meeting, I expect a more hawkish tome from Federal Reserve Chair Jerome Powell which could maintain upward pressure on interest rates.

It's worth noting that the market has already adjusted to reflect this inflation environment, and the conundrum the Federal Reserve faces with respect to combatting inflation while maintaining economic growth. With the S&P 500 down ~18.5% year to date, my sense is that a lot of bad news - including a reasonable probability of a near-term recession - has already been priced into stocks and other risk assets.

As an investment advisor, I position most of my portfolios according to my clients' unique levels of risk tolerance, goals, and investment time horizon. For the majority of Evolve Investing portfolios, our positioning today is generally defensive with the following characteristics:

- Lower technology sector exposure relative to the overall market.

- Larger companies with solid balance sheets and proven access to capital.

- A generally higher percentage of bonds and cash.

- In some cases exposure to diversified commodities.

If you have any questions about your portfolio or positioning, you're welcome to email me directly, or schedule a call via this link.

Best,

Peter Hughes, CFA