Equity and bond markets had a brutal week as today’s CPI report confirmed that inflation has accelerated to a 40-year high, which has traders speculating that the Fed will have to raise rates faster than expected. In addition to that data, we saw the lowest Consumer Confidence number in the surveys history, which dates back to the 1940s. The S&P ended the week down 5.1% and is now down 19% from its January high. The tech-heavy Nasdaq 100 has plunged by a staggering 28%. Bonds plummeted with rates going up, as the 10-year now stands at 3.16%, nearly up 3x from its 52-week low of 1.132%.
Pessimism is high and markets are reflecting that. What we are seeing is recessionary outcomes being priced into the market. Usually the market bottoms long before the economy does, so keep that in mind. Stocks and bonds are far more attractive than they have been since March 2020. Volatility was up substantially this week, which ratchets up the price of options of course, but which becomes irrelevant upon options expiration. We are seeing very good fundamental developments on our core positions, including with Assured Guaranty, which is getting closer to fully resolving its Highway Transportation Puerto Rico bonds that were the biggest problem during that bankruptcy process. Most of our companies are involved in big buybacks are able to exploit these lower prices by purchasing their own stock on the cheap.
In about a month we will start seeing earnings results, which I’d expect to be pretty good and quiet down some of the worst fears that are so prevalent. Real money is made when markets are challenging. The surefire way to fail in financial markets is buy when everything is expensive and sell when everything is cheap. Taking an unemotional view is imperative. From a technical standpoint, markets are testing the lows again, which would be expected, so we’ll see how things go but either way I’m very comfortable we will be in good shape when all is said and done. Below are two recent research reports on AIG and Citigroup for you to review at your leisure.