As Registered Investment Advisors, we are tasked with generating “real return”, which is calculated by subtracting inflation from the total return we generate. Inflation was rampant during the latter half of Covid as supply constraints and labor shortages swelled prices across the board.
In response, the Federal Reserve and other central banks aggressively tightened policy, increasing rates by 500 basis points. The overwhelming bet among finance professionals is that the aggressive policy would lead to recession. Very few expect a “soft landing” where inflation eases while Gross Domestic Product remains positive. But we would argue that the soft landing is already upon us.
As you can see from both the consumer price index and the personal consumption expenditures chart below, inflation is abating. However, 2022 Q4 and 2023 Q1 GDP grew at 2.6% and 1.1% respectively. The policy has worked, inflation is easing, and the consumer remains strong. Given such and the fact that both stocks and bonds took a pounding in 2022, the investment world is awash in opportunities, and we are taking advantage. Year-to-date our Tactical Allocation Strategy has generated 8.95% and we continue to see opportunities in both stocks and bonds.
Expect rates to remain elevated and inflation to subside. In these environments, the opportunity to generate “real return” is enhanced and we are allocated for such.
As always, I appreciate your continued trust and confidence.