There has been no shortage of hawkish Fed speak leading into tomorrow’s speech by FRB Chair Powell at the Jackson Hole symposium.  As noted yesterday, the “transitory narrative” has been replaced by a constant flow of adamant statements the Fed will do whatever is necessary to squelch inflationary pressures.

At this juncture, the markets and the Fed are bifurcated.  The Fed is making it “very clear” with its intents thus suggesting the tightening cycle is nowhere close to a conclusion.  On the other hand, the markets believe the worst is behind us and the Fed may begin reducing rates in early 2023.

Millions can be potentially made or lost depending upon the ultimate outcome.

The value trade is again returning to favor.  As with all asset classes and strategies, value went through an extended period of underperformance.  The 2010s were not kind, especially from 2017 to 2020, but the 2020s are making up for some over the underperformance.

A popular explanation for value’s recovery are interest rates.  Value stocks deliver cash flows in the immediate future, while growth stocks promise cashflows farther in the future.  As rates rise, the present value of future cash flows is diminished relative to current cashflows.

Value is typically associated with the “hard economy” rather than intangibles such as algorithms and copyrights.   The ratio of productive assets to current value is hovering around its lowest levels since Benjamin Graham wrote The Intelligent Investor according to the mega sized quant firm of AQR Capital Management.  Accordingly, intangibles still comprise about 80% of the S & P 500 vale as compared to tangibles.

Introductory Finance states in an inflationary environment, hard assets outperform.

As noted the 2010s, especially 2017-2020, was not favorable to value investors, perhaps partially the result of benign inflation.  Inflation began to emerge in late 2020 hence a possible explanation for value’s resurgence.

Wall Street is split whether value’s resurgence will continue.  At the risk of sounding cynical, it is not what you write but rather why you write it.  The ownership of companies labeled as growth far exceeds the ownership of companies regarded as value.

Commenting on yesterday’s market activity, equites were quietly volatile ending nominally higher.  Treasuries sold off across the curve with some suggesting the President’s proposal to forgive $300 billion in student loan debt as the possible catalyst for by definition such is inflationary as it adds  more to the national debt.

Last night the foreign markets were up.  London was up 0.16%,  Paris down 0.01%  and Frankfurt up[ 0.25%..  China was up 0.97%,  Japan up 0.58%  and Hang Seng up 3.63%.

Futures are up about 0.25% as China’s massive stimulus steadied nerves ahead of tomorrow’s address by Powell. The 10-year is up 3/32 to yield 3.10%.


The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.