October 2021

“Life is full of temporary situations ultimately ending in a permanent solution.” 

Rodney Dangerfield

October picked up where September left off as attention remained focused on the length and depth of the inflationary cycle.  Central bankers remained united in their characterization of the phenomena as temporary, while acknowledging that continuing high inflation “was more persistent than expected.”  In the meantime, labour market and supply chain disruptions continued, putting pressure on both prices and wages.  Traditionally, when wages rise in response to higher prices there has been a tendency for cyclical inflationary spirals.  In the current circumstances, with a combination of COVID restrictions and increased red tape there is a real risk that mobility of labour will not return to pre-2020 levels and consequently the credulity of the word temporary will be tested.  Perhaps Mr Dangerfield’s maxim might be borne out.

Markets remained volatile as oil prices reached levels not seen in 7 years while Treasury yields accelerated their rise, gaining 22 basis points before significantly retracing by month end.  Speculation about upcoming central bank meetings and potential policy changes has been a major source of volatility as the successful reversal of COVID related stimulus represents one of the greatest monetary challenges in modern times.  Overlay all the political considerations (new Bundesbank president, Fed chair renewal process) and it seems likely the volatility is unlikely to go away soon.  Equity markets nonchalantly climbed the wall of worry, with the SPX leading the way with a 7% rise driven by strong corporate earnings.  With tighter liquidity conditions coming in the months ahead one can reasonably ask how long these buoyant markets can last.

It was a mixed month for European financials as large cap bank stocks overall rallied on robust earnings while individual stock performances were often driven more by positioning than actual results versus consensus. Credit markets were buffeted by sovereign yield volatility and a lack of engagement by market participants with very few idiosyncratic moves throughout the month. Against that backdrop the funds A shares were down -0.50% with both our credit and equity positions underperforming. Fixed income contributed -29bps of gross performance versus -16bps for Equities. We used the volatility as an opportunity to adjust various exposures but overall, we remain fairly defensively positioned as stretched valuations and the potential crosscurrents from macro events lead us to be cautious about near term outlook.