@mujo thanks this is my wheelhouse, i suppose. the interesting aspect of the change from interest rate impact (now largely past) and earnings impact (now/comin0 should be the varying impact on different types of stocks, ie defensives/cyclicals. defensive being more exposed to IR moves and cyclicals more economically sensitive. the overall impact is a matter of degree between the two opposing forces. imo

Good point, makes it difficult to work out whether any sector/style of equity investment will outperform the other.

Good article and interesting way to think about it.

Its hard to ignore the macro factor in markets at present as it is dominating news cycles and having a dramatic effect on asset prices. The thing is, if you look back at what any market strategist was saying 6 or 12 months ago, how many were right? Its notoriously difficult to predict these things consistently, let alone the second order effects thereafter. If you had told me cost of living pressures and interest rates were going to rise 12-18 months ago, I would have said a luxury retailer like LVMH would be on track for a hiding and sure, the stock derated like a few other things last year....but to sell it based on that forecast would have been a mistake. Did anyone see market strategists calling for a strong rally in December last year?

Just have to come back to fundamentals and block out the noise - growing, competitive advantage, high defensible margins, appropriate valuation with a margin of safety.

Just on this, one other thing I would comment is the disconnect between US 10 year yields and the terminal fed rate. A large disparity has now opened up - 10yr yields are around 4% while the terminal funds rate is pointing to 5.5%+. In previous cycles, bond yields have historically peaked at approx the same rate as the peak fed rate.

Last year, the Nasdaq was hit every time bond yields ratcheted higher. Still seems plenty to go in terms of multiple compression.

The one issue with this blog, I think, is this statement:

"At the same time, inflation has peaked and is slowly declining. Declining inflation should lead to declining inflation expectations in 2023."

It may occur, but if one were to apply this thesis, and it turns out wrong, one will lose a lot of capital in the process. Historically, equities have never bottomed at this stage of the tightening cycle - but there is always a possibility for a first though.

Would you really lose a lot of capital though? What you’re suggesting is that you would buy before the market bottomed… as long as you’re happy to hold for the bounce this doesn’t seem too risky (providing a long time horizon)

Looks like Wine is a good bet, no matter the style of inflation.

Time for another glass, bottoms up!