A man points to a computer screen showing stock information in this illustrative photo taken in Bordeaux, France on March 30, 2016. REUTERS / Regis Duvignau

US investors grappling with the latest market volatility and evidence of inflation say they have positioned themselves for more unexpected problems on the road to recovery.

Moves to hold assets that could withstand a prolonged surge in inflation come as data earlier in the week showed US consumer prices increased by the largest amount in 12 years in April, a jump well above Wall Street expectations. Bottlenecks in global supply chains and a shortage in the labor market were among the reasons for soaring prices, according to Labor Department data.

Another loophole for investors trying to navigate the economic reopening is the Federal Reserve, which expects a rise in inflation to be “transient,” meaning it will be slower to raise prices. interest rate to compensate for persistently low inflation over the past decade.

“What we have learned in the last 24 hours is that the magnitude of inflation is going to be bigger than anyone thinks and it is too early to tell how persistent it will be,” Bob Miller, head of fundamental fixed income for the Americas at BlackRock, said Thursday. “This will be the summer debate.”

Miller, who said his company held more cash than it normally would, expects the combination of Fed policy and signs that inflation may exceed expectations “will create more instability in financial markets over the next summer and fall if not recomposed. “

There has been evidence of more careful behavior in recent weeks. Investors transferred $ 57.3 billion in cash in the last week of April, the largest cash inflow since March 2020, and followed with the largest weekly gold inflow in three months during the first week of May, according to Bank of America Global Research.

“The rise in inflation that we were expecting will be higher and more bumpy than expected,” said Brian Nick, chief investment strategist at Nuveen, who has increased his weight in small-cap stocks and is heading into equities. emerging markets in anticipation of reflation. the trade continues throughout the rest of the year.

“We are not facing runaway inflation, but we are dealing with the fact that everyone has a different definition of what transient means,” he said.

TRANSITIONAL PROBLEMS

Inflation fears weighed on equities this week, especially growth stocks. Overall, the benchmark S&P 500 (.SPX) is down around 3% from its all-time high earlier this month and the Nasdaq by around 7% (.IXIC) compared to at a recent high, partially rebounding Thursday after steep drops earlier in the week. .

“I think every portfolio manager, every growth equity manager, is trying to figure out … are we going near the bottom, are we going to retrace 25% more? That’s why you see the market moving from back and forth, ”Brad Gerstner of hedge fund Altimeter Capital said at the Sohn conference on Wednesday.

Garrett Melson, a portfolio strategist at Natixis Investment Managers, said the reopening of the global economy will likely take longer than many investors predict, leaving the recent market rotation towards cyclical stocks with a “considerable trail. “, did he declare.

The Russell 1000 Value Index (.RLV), for example, is up 15.5% year-to-date, while the Russell 1000 Growth Index (.RLG) is up 2.8%. over the same period.

Some inflation-worried investors favor inflation-protected Treasuries, and 10-year TIPS yields are near a three-month low. Benchmark 10-year yields, meanwhile, stabilized after rising in the first three months of the year.

“The recent preference for TIPS is a recognition that inflation could potentially accelerate and if it picks up it could persist longer than the market or the Fed expects,” Jim said. Besaw, chief investment officer at GenTrust Wealth. Management, which increased its positions in commodities and regional banks in anticipation of a long period of rising inflation.

Not all top fund managers are equally affected. Cathie Wood, whose ARK Innovation ETF was the best-performing U.S. equity fund last year, said in a webinar on Tuesday that continued innovation will make deflation a stronger force than inflation in the years to come. .

Indeed, the picture of inflation is difficult to read.

“It’s a little difficult to determine what’s really going on,” said Gregory Peters, head of multi-sector and strategy for PGIM Fixed Income. “You have so many supply line disruptions, you have data quirks, you have labor disruptions.”

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