From 2009 to 2022 inflation was low, rates were low, capital markets were open, and the optimal strategy for investors was to hunt yield.
In 2022 inflation became a problem, and the Fed reacted and raised rates, and capital markets became more challenging, and investors sold credit and equities and put money into rising risk-free rates.
Because of cumulative Fed action, inflation is coming down in 2023 and rates will be coming down and the hunt for yield will be coming back and capital markets will reopen.
The bottom line is that the ongoing covid-driven inflation shock has lasted longer than the Fed and the market initially expected, but the Fed’s commitment to low inflation is why the inflation problem in 2022 will turn out to be transitory. Investors should appreciate that we in 2023 are transitioning back to low inflation again, and the optimal asset allocation strategy in 2023 is likely to be the opposite of what worked in 2022. I discuss this in more detail in our 2023 outlook report and 45-minute video here on ApolloAcademy.com.
Source: Bloomberg, Haver Analytics, Apollo Chief Economist
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