The second quarter of 2022 offered up a toxic brew for capital markets with steep losses in almost every traditional asset class. Alternatives on the other hand offered a brighter picture for investors. Most alternative categories did well on a relative basis and others even posting positive returns amidst the carnage. The economic situation grew dimmer with projected slowing and even potentially negative GDP growth and inflation levels so high they threaten to induce hypoxia or at least a 1970s flashback. There was some hope that peak inflation had been reached and more moderate levels would allow for a less aggressive rate path. Unfortunately, the Producer Price Index (“PPI”) remained above 10% and the Consumer Price Index (“CPI”) moved higher and the war in Ukraine continued with little hope for a near-term solution. 

In June, the Federal Reserve (the “Fed”) raised the Fed Funds Target Rate by 75 basis point (“bps”), the largest increase since 1994. Along with a stunning large hike, there was a reiteration that reigning in of inflation was the top priority no matter the economic costs. This of course is quite a turnaround from two years ago (August 2020) when at the annual Jackson Hole symposium, Fed Chair Jerome Powell announced a major shift in policy: the central bank would allow inflation to move above its 2% target as inflation was not a worry. In hindsight, the timing of that policy change looks just short of disastrous. Investors are understandably nervous that once again, the Fed may be implementing a significant policy shift with questionable timing. One indicator of how challenging the situation is, is the gap between the CPI and Fed Funds rate. While it has recently narrowed, it is still near record highs or the 99th percentile, which means there is a long way to go in the inflation battle.

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