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CIO Thoughts: How to position your portfolio regardless of CPI print

Despite expected increases in the August headline YoY and MoM CPI (Consumer Price Index) report, the likelihood of a hike at the next FOMC meeting (Sep 20) is low.

At the Jackson Hole symposium, Powell expressed a more patient approach. The CME FedWatch Tool currently shows an 8% chance of an increase.

However, the Fed expressed that it is paying close attention to the services (related to rising wage costs) and shelter (related to housing activity) categories, so meaningful upticks in these measures could prompt the Fed to increase interest rates at future meetings. Here are forecasts for this Wednesday's August CPI prints: CPI YoY: Consensus = 3.6%, Prior = 3.2% CPI MoM: Consensus = 0.6%, Prior = 0.2% Core CPI YoY: Consensus = 4.3%, Prior = 4.7% Core CPI MoM: Consensus = 0.2%, Prior = 0.2%

It seems inflation would likely have to come in meaningfully hotter than expected for the Fed to raise interest rates at the September FOMC meeting. But if there is no evidence of cooling in services and shelter inflation, the odds of a rate hike at the October/November meeting may increase.

If the upcoming CPI prints indicate disinflation in such areas, rates may already be at their peak. However, how fast inflation reduces to the 2% target will likely dictate how long the Fed will keep interest rates at such levels.

Astoria’s bottom line

  • Equity risk premiums are not attractive for US large-cap index beta stocks.

    • Investors must look at Europe/Japan, US SMID, and cyclically oriented sectors: the coming market leaders in a post-high real rate, structurally higher inflation world.

  • US large-cap stocks are priced for perfection.

  • We believe real rates will be higher and stickier for longer, so we partnered with AXS to launch PPI in Dec 2021.

  • We highly doubt five cuts next year; we think the bond market has this wrong.

  • The crowding into semi and large-cap tech doesn’t make us bullish.

  • We are entering a world of deglobalization, onshoring/reshoring; in that world, one needs to own real assets and stocks in sectors such as industrials, materials, energy, etc.

  • Forget trying to figure out the next rate hike. Instead, build a portfolio that can sustain a world of deglobalization, higher real rates, and higher inflation.

  • Nothing stays at the top forever – MSFT wasn’t even in the original FAANG index.

  • We had the fastest rate hiking cycle in half a century, and core PCE is still 2x the Fed’s inflation target.

  • Inflation-linked assets are cheap. PPI trades at a 10 PE ratio, which is 50% cheaper than the S&P 500.

  • Last year, PPI was up 4% while S&P was down 18%. This year, even with the S&P 500 up 17%, PPI is up 6%. Those are positive attributes for a multi-asset portfolio from a correlation standpoint.

  • PPI complements a multi-asset portfolio and can act as insurance during periods of elevated inflation.

On Wednesday, October 11, 2023, Astoria will be hosting a webinar to share with investors how to invest amid AI, expensive valuations, and higher rates.


John Davi

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Important Risk Information

There is no guarantee the sectors or asset classes the advisor identifies will benefit from inflation. Fund may invest a larger portion of its assets in one or more sectors than many other funds, and thus will be more susceptible to negative events affecting those sectors.

Equity Securities Risk: Equity securities may be particularly sensitive to rising interest rates, as the cost of capital rises and borrowing costs increase. Equity securities may decline significantly in price over short or extended periods of time, and such declines may occur in the equity market as a whole, or in only a particular country, company, industry or sector of the market.

Commodities Risk: Commodity prices can have significant volatility, and exposure to commodities can cause the value of the Fund’s shares to decline or fluctuate in a rapid and unpredictable manner. The values of commodities may be affected by changes in overall market movements, real or perceived inflationary trends, commodity index volatility, changes in interest rates or currency exchange rates, population growth and changing demographics, international economic, political and regulatory developments, and factors affecting a particular region, industry or commodity.

Futures Contracts Risk: The Fund expects that certain of the Underlying ETFs in which it invests will utilize futures contracts for its commodities investments. The risk of a position in a futures contract may be very large compared to the relatively low level of margin the Underlying ETF is required to deposit. In many cases, a relatively small price movement in a futures contract may result in immediate and substantial loss or gain to the investor relative to the size of a required margin deposit. The prices of futures contracts may not correlate perfectly with movements in the securities or index underlying them.

TIPS Risk: Principal payments for Treasury Inflation-Protection Securities are adjusted according to changes in the Consumer Price Index (CPI). While this may provide a hedge against inflation, the returns may be relatively lower than those of other securities. Similar to other issuers, changes to the financial condition or credit rating of the U.S. government may cause the value of the Fund's exposure to U.S. Treasury obligations to decline.

Shares of ETFs are bought and sold at market price (not NAV) and are not individually redeemed from the ETF. Brokerage commissions will reduce returns. NAVs are calculated using prices as of 4:00 PM Eastern Time. The closing price is the midpoint between the bid and ask price as of the close of the exchange. Closing price returns do not represent the returns you would receive if you traded shares at other times.


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