The Fed Will Slow If Not Pause, Inflation Will Reverse—and the Climate Will Turn Positive for Equities: CPLIX’s Grant

In just-published commentary, Calamos Co-Chief Investment Officer Michael Grant shares his high-conviction view that:

• The Fed will slow or pause its rate-hiking before the year’s end, cheering the financial markets.
• Market volatility will continue at a heightened pace, thanks to the dissonance created in 2022 by the gap between projected vs. actual monetary policy.
• Equities will bottom through late autumn, with the setting becoming more constructive as disinflation takes hold in 2023.
• The inflation surge “will reverse symmetrically” over the next four to five quarters.
• A material weakening of the profit cycle, leading to the next leg down in equities, should not be expected until late 2023 at the earliest.

Grant is Senior Co-Portfolio Manager of Calamos Phineus Long/Short Fund (CPLIX), which closed the first 10 months of the year with a -2.24% return versus the S&P 500 Index’s decline of -17.70%. This result reflected the fund’s positive beta to equities, given its average net equity exposure of 58.73% in Q3.

“Fears around an imminent fundamental downturn are misplaced,” writes Grant, “because the problem today is inflation, not deflation. Inflation implies healthy levels of nominal activity that feed directly into consumer and corporate income.” By the middle of next year, “fears of runaway inflation will appear absurd,” he comments.

Acknowledging that risks of recession have become heightened, “we believe an actual downturn is neither imminent nor likely to be severe.” The balance sheets of households and the corporate sector are “strikingly healthy based on key metrics like debt-to-income ratios and liquidity levels. The seeds of the end of any expansion are normally behaviors that lead to excessive spending and borrowing, which has not happened in the current cycle,” he says.

Grant believes he’s more optimistic than most about the spending potential of the US consumer. “The market is viewing consumer strength as a sign that the Fed will ‘keep at it.’ Our view is that the US consumer will hold together long enough for inflation to cool. With $2.3 trillion in excess savings, the rate sensitivity of the consumer may be less than generally assumed.”

Third quarter earnings reports to date have been generally positive, supported by continuing strong consumer demand. CPLIX's weightings in cyclicals, such as airlines, transportation and hotels, as well as financials, have been well suited for pent-up post-COVID consumer demand.

While positive on the medium term outlook for equities, Grant notes that the bull market in equities ended in December 2021. He expects “the major indices to move in a broad rangebound pattern between today’s levels and the former highs for much of the current decade.”

Consequently, he says, an investment landscape characterized as a long era of price stability is being replaced by a new experience of quasi-price instability (read more here).

For more information about Grant’s perspective or about CPLIX, reach out to your Calamos Investment Consultant at 888-571-2567 or caminfo@calamos.com.