T minus 10, 9, 8….

The investment landscape is pockmarked by intractable statistics that continue to impose strategic and psychological barriers to the short term potential of portfolio alpha. The realities that inflation, war, unemployment, and social injustice are not “quick-fix” problems have never been more apparent than now, in a post-pandemic global economy.

Given that the Federal Reserve and other central banks have embarked upon a policy of raising interest rates to attack (post-Covid) high demand (inflation) one might wonder whether their goal is to perpetuate economic recovery or to stifle it. Clearly, the events in the banking industry over the last month have cast a long shadow over this course of action. If the economy is truly growing, we are hard pressed to find it but for only a few select sectors, such as energy and technology.

Despite what the Fed calls a “temporary” condition regarding rate hikes, permanence is being built into their model. In fact, one could make the argument that a sustainable, broad recovery is helped by higher interest rates. Inflation and robust demand are definitional to a multi-tiered expansion, signifying full capacity, higher savings rates, discerning borrowing, and lower debt. Not only that, but high interest rates also provide for an investment option other than equities to generate portfolio returns.


It is no coincidence that our bond allocations have increased significantly during the past year while our cash levels have diminished accordingly. Combine this with the fact that the probability of stocks outperforming bonds has fallen to the lowest level in years. Conversely, the likelihood of bonds outperforming stocks on a total return basis has risen for the first time in two years. All these data stand in sharp contrast to where we were at the beginning of the pandemic. Then, as the economy was in a state of “benign equilibrium”, equities were seemingly the only investment option during a period of near-zero percent interest rates. Today, our relative strength integers (RSI) show stocks to be relatively overvalued but not written off completely.