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Inflation and deltas

Despite the uncertainty regarding the Fed monetary policy and what interest rates they deem appropriate for an environment with higher than target inflation, investors have a historical high allocation to stocks. Currently and on aggregate, the allocation is as high as it was during the era. Valuations are elevated, but still within a reasonable range for the level of inflation and earnings growth. Having said that, at current valuations, they are very sensible to changes in growth and inflation. A small negative change, can produce bid deltas, with spikes in volatility. On Wednesday, the U.S. Bureau of labor statistics will publish the CPI for the month of April, which according to last print reads 3.5%. This is an important data point to see if the trend away from the 2% target continues or if it has revert back to downtrend.

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