top of page

Should you fade cyclicals and inflation sensitive assets?

For some time, our view has been that the economy is accelerating (which bodes well for inflation sensitive assets, cyclicals, and small & mid-cap stocks), bonds will struggle, investors should be overweight stocks, etc.

From my vantage point, Astoria has been on the forefront advising our clients (dating back to Q3/Q4 last year) to do the following:

  1. Allocate a portion of their assets to cyclicals and inflation sensitive assets to hedge portfolios (inflation hedges were cheap and carried well in a portfolio)

  2. UW bonds

  3. Allocate to commodities and commodity equities

  4. Diversify into the small-cap factor

  5. Move away from the 60/40 US stock / US bond portfolio

  6. Use liquid alternatives to hedge equity risk given bond rates were reaching a floor

The above views are now consensus trades. More on that in a minute.

A separate but related point is that there is currently a rotation occurring where investors are selling unprofitable technology and re-opening stocks while moving up the liquidity and quality spectrum. This makes sense to us given the huge valuation and outperformance in these cohorts last year. There are calls on the street regarding peak growth and a transition into a new part of the economic cycle. I simply think most assets are fully priced.

When I look around, I see a lot of expensive assets and I am having trouble finding value. Inflation and cyclicals still offer value in Astoria’s eyes which is why we are leaning there. But I do think they should be risk managed and hedged appropriately.

Given the sharp selloff earlier this week, we wanted to remind investors a few of their headwinds:

  1. Cyclicals and inflation sensitive assets are getting picked up by momentum/trend following strategies (I have never seen anyone successfully fade momentum)

  2. They have cheaper valuations compared to deflationary assets (remember nobody wanted to own inflation hedges for much of the past 10 years)

  3. Mainstream media are picking up on

  4. Rising wages

  5. Shortage of labor

  6. Parabolic price action in commodities (look at lumber futures, copper, etc.)

I still think there is 1-2 quarters in this portfolio tilt. In a taxable account (depending on the client’s risk tolerance of course), we would hedge these cohorts with higher quality, large-cap companies/ETFs that have strong free cash flows, ability to grow earnings and dividends. To further lower portfolio volatility of this solution, we would pair it with short duration bonds (ideally floating bonds that reset higher and bonds which provide inflation protection).

Do we still like small & mid-cap stocks? Yes, and in a tax deferred account given the well documented small-cap risk premia. Keep in mind that our small-cap and mid-cap ETFs incorporate the quality factor which means they are more defensive and still trade at a discount to large-cap market multiples. But in a taxable account, we now prefer higher quality dividend paying companies to accompany our cyclical and inflation sensitive assets.

Also, we wanted to point out that we rebalanced our Short Duration ETF Model this week. We felt our duration was too high and we needed to rebalance our credit and interest rate risk exposures. Our rebalanced model now has a 1.5 duration and we are split amongst the following:

  • 30% floating rate/inflation protection

  • 30% corporate bonds

  • The rest in actively managed very short-dated liquidity profiles (active fixed income management makes a lot of sense for us given all the cross currents in rates/credit)

Remember, markets are forward looking and the rate of change is what drives financial assets. If the consensus believes a theme to be the best strategy, then you can usually count on it not happening (at least on a return per unit of risk basis). Everyone thought Bitcoin was going to the moon this year and sure enough it collapsed 30% in a few days. Bitcoin may still rally to the moon, but one must be super careful when a prevailing theme becomes a consensus trade.

Speaking of Bitcoin, we were asked if Bitcoin was leading the stock market. A sign of the times!


Astoria Portfolio Advisors

Any third-party websites provided on are strictly for informational purposes and for convenience. These third-party websites are publicly available and do not belong to Astoria Portfolio Advisors LLC. We do not administer the content or control it. We cannot be held liable for the accuracy, time sensitive nature, or viability of any information shown on these sites. The material in these links is not intended to be relied upon as a forecast or investment advice by Astoria Portfolio Advisors LLC, and does not constitute a recommendation, offer, or solicitation for any security or any investment strategy. The appearance of such third-party material on our website does not imply our endorsement of the third-party website. We are not responsible for your use of the linked site or its content. Once you leave Astoria Portfolio Advisors LLC's website, you will be subject to the terms of use and privacy policies of the third-party website. Refer here for more details.


bottom of page