Inflation showing decisive “break” in pattern. Rally strengthening = focus on lower quality. 6 names. 2H rally intact.

The rally seen in equity markets post-CPI has been largely met with skepticism. This is essentially true of the gains seen over the past week and past month. Below is a comment from a sellside strategist and is emblematic of the pushback we get from clients (keep in mind, the sellside often mirrors what institutional investors broadly are saying).

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As to why, we think much of this is explained by an anchored cognitive bias. The following contributes to investors seeing “half-empty”

  • Fed is raising rates and the binary conclusion is stocks go down
  • Inflation has been problematic for the past 16 months, and investors see it as “sticky” ala 1970s-80s, meaning it will linger for years and years
  • Stocks have been falling, so the momentum is negative
  • Stocks are rising only for “technical reasons”

On that latter point, I had lunch this week with an institutional investor who in summary said:

  • “there is no fundamental reason for stocks to be going up, especially if someone cares about earnings”
  • “the only people who are bullish are doing it for technical reasons, has anyone ever met a really rich technician?”
  • “name one fundamental investor who likes stocks here, there are none”
  • you get the picture. Deep skepticism.
But as we have discuss...
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