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November 2022 Investor Letter: Inflation Better Than Feared but Still Red-Hot

Market Summary

  • Equities were strong overall

  • Smaller rate hikes ahead

  • Inflation was not as bad as expected, but still red-hot

  • The yield curve remains inverted


November was another strong month for equities. The S&P 500 gained 5.4%, the Nasdaq 100 rose 5.6%, and the Dow climbed 6.0%. The markets rallied to close the month, fueled by the prospect of smaller rate hikes ahead. Federal Reserve Chair Jerome Powell signaled that smaller hikes could happen as early as the next Fed meeting in December. However, he added that more rate hikes will be needed to quell inflation, with the ultimate rate likely higher than previously anticipated.


October’s headline inflation reading (CPI) increased less than expected. Total CPI increased 0.4% MoM vs. consensus at 0.5% and is up 7.7% YoY vs. consensus at 7.9% YoY. PPI (the producer price index) also increased less than expected. Although inflation remains red-hot, the lower-than-anticipated readings led to a relief rally in the markets.


The treasury yield curve remains deeply inverted, with two-year treasuries yielding more than 10-year maturities. The yield curve inverted earlier this year in July and has only worsened since then. An inverted yield curve has preceded every US recession for the past half-century.


alphaAI Summary

During the month, all of our strategies outperformed the S&P 500 on a risk-adjusted basis. Given the general volatility in the markets, our models have been focused on reducing potential losses through market exposure management. Cash reserves were strategically increased during weak periods of the month to limit our downside. During the strong, latter half of the month, equities exposure was strategically increased to take advantage of the relief rally. Looking forward, we continue to expect significant volatility as the economy and Fed provide mixed signals to investors.


 

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