Market Insights: 15/02/2023

“Risk means more things can happen than will happen”

Elory Dimson

The above quote is a tell-tale sign for pessimists that history has sided more often with optimists. That said, reasonable risk compensation matters and in our latest market insights, we will try to do just that i.e. eke out the elusive equity risk premium. But first let’s try to make sense of yesterday’s price action and, since daily moves can just be noise, also the year-to-date trend.

While yesterday’s inflation data was a tad higher than consensus, the equity market was rather unfazed. Yes, the market promptly repriced the likelihood of higher-for-longer interest rates, yet cyclical and long duration equities ended the day higher whereas equity volatility lower. The same price action holds true this year – with cyclical and tech sectors outperforming defensives at the same time as rising nominal and real yield in the backdrop of an inverted yield curve (chart 1 & 2).

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