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Why inflation is unlikely to spoil the equity rally

As the second-longest equity bull market on record enters its tenth year, it’s natural to ask what could end the rally. Higher US inflation leading to faster rate hikes is one of the key risks. But so far there is little in the data to make the Fed fear overheating. We expect the Fed to hike rates this week, in line with our view for one 25bps rate hike per quarter this year.

Entering choppier waters

Investors who kept calm, stayed invested, and rebalanced through the recent correction look set to be rewarded in a month that highlighted the difficulty, and potential costs, of trying to time the market. The worst week since 2016 was followed by the best week since 2015, and global equities are now just about 5% short of their all-time highs. Investors who sold out any more than three weeks too early and bought back any more than a week too late would still be worse off than a buy-and-hold investor.

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