Good Evening:

The market had its first down week after a strong rally. Macro concerns are high and there’s no shortage of bears on the street. At the same time, inflation rolling over has proven a strong catalyst. When inflation is high bonds and stocks are positively correlated, which gives institutions nowhere to run and nowhere to hide. When the environment is disinflationary or deflationary the correlation is generally negative. The negative correlation is one of the drivers of the oft cited 60/40 portfolio. And then remember also that there are almost no living portfolio managers that have been alive in an inflationary environment like we face today. Our Head of Research, Tom Lee, thinks that if inflation has peaked that this should set us up for a nice rally in the 2H where new all-time highs are possible. He will elaborate more below.

Mr. Lee points out that the scars from the 2008 Global Financial Crisis may be coloring people’s fears. Markets do tend to climb a wall of worry and inflation was the main thing investors were afraid of. However, the de-anchoring of inflationary expectations that led to the “shock and awe” approach that Paul Volcker famously took with markets in the beginning of the Reagan Administration is not occurring. If the market’s expe...

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