CPZ Calamos Long Short Equity and Dynamic Income Trust

TIMELY INFORMATION INSIDE

Long/Short Equity & Dynamic Income Trust (CPZ)

SEMIANNUAL REPORT APRIL 30, 2023

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TABLE OF CONTENTS

Experience and Foresight

Our Managed Distribution Policy

Closed-end fund investors often seek a steady stream of income. Recognizing this important need, Calamos closed-end funds adhere to a managed distribution policy in which we aim to provide consistent monthly distributions through the disbursement of the following:

•Net investment income

•Net realized short-term capital gains

•Net realized long-term capital gains

•And, if necessary, return of capital

We set distributions at levels that we believe are sustainable for the long term. The Fund’s current monthly distribution is $0.1400 per share as of April 30, 2023. Our team focuses on delivering an attractive monthly distribution, while maintaining a long-term emphasis on risk management. The level of the Fund’s distribution can be greatly influenced by market conditions, including the interest rate environment, the individual performance of securities held by the funds, our view of retaining leverage, fund tax considerations, and regulatory requirements.

You should not draw any conclusions about the Fund’s investment performance from the amount of its distribution or from the terms of the Fund’s plan. The Fund’s Board of Trustees may amend or terminate the managed distribution policy at any time without prior notice to the Fund’s shareholders. However, at this time there are no reasonably foreseeable circumstances that might cause the termination of the Fund’s managed distribution policy.

For more information about any Calamos closed-end funds, we encourage you to contact your financial advisor or Calamos Investments at 800.582.6959 (Monday through Friday from 8:00 a.m. to 6:00 p.m., Central Time). You can also visit us at www.calamos.com.

John P. calamos, sr.

Founder, Chairman
and Global Chief
Investment Officer

CALAMOS Long/Short Equity & Dynamic Income Trust SEMIANNUAL REPORT   1

Dear Fellow Shareholder:

Welcome to your semiannual report for the six months ending April 30, 2023. In this report, you will find commentary from our portfolio management team, a listing of portfolio holdings, financial statements and highlights, and detailed information about the performance and positioning of Calamos Long/Short Equity & Dynamic Income Trust (CPZ).

Innovative Multi-Asset Approach Supports the Search for Steady, Attractive Income

Our experience with closed-end funds dates back to 2002, and we have always recognized that many investors choose closed-end funds to support their search for income. Like all our closed-end funds, CPZ is managed to provide steady (although not assured) monthly distributions. As of April 30, 2023, the monthly per share distribution was $0.1400, and the annualized distribution rate was 10.99%^† on market price. In comparison, the dividend yield of S&P 500 Index stocks was 1.66%. Yields were also still relatively low within the US government bond market with the 10-year US Treasury yielding 3.45% at period end. Therefore, the Fund’s annualized distribution rate has soundly outdistanced both fixed income and equity alternatives.

Market Review and Outlook

For the period, stock markets around the world advanced. Market participants were encouraged by the prospect that the Federal Reserve would slow or pause its tightening cycle and by economic data that was often better than initially feared. Looking abroad, investors cheered the economic reopening in China.

In a reversal of fortunes from 2022, growth stocks outperformed their value counterparts by a wide margin. Technology and communication services companies, including many of the bellwether companies that struggled in 2022, dominated market leadership. Many areas of the fixed income market also posted healthy gains, with both investment grade and high yield benchmarks advancing.

2   CALAMOS Long/Short Equity & Dynamic Income Trust SEMIANNUAL REPORT

Despite these advances, the period was also volatile. The failures of Silicon Valley Bank in the US and Credit Suisse overseas created a burst of fear and raised the specter of widespread bank runs. However, coordinated action by regulators and other large banks quickly dampened anxiety. Inflation has been another key focal point of investor concern. We expect inflation to continue to moderate through the summer months in an on-again, off-again fashion, punctuated by bouts of volatility in oil prices.

Despite economic and market uncertainties, we continue to see many opportunities across asset classes. We believe individual security selection and active management are essential, given the economic backdrop. In the “Investment Team Discussion,” our portfolio managers discuss where they see opportunities and how they are managing risk.

Perspectives on Asset Allocation

I’m often asked what I believe are the “secrets” of investing. It’s an easy question to answer—there are no secrets. However, there are some basic principles that I believe can best position investors for success.

One of the most fundamental principles is to stay focused on the long term. Trying to predict the short-term ups and downs in the market is a dangerous strategy. Far too often, I’ve seen people give in to emotions, which can result in selling into down markets but missing the up markets.

Another essential principle is diversification. Various investments tend to perform differently depending on interest rates, inflation, or the economic environment. The performance of investments can also be influenced by fiscal policy, political uncertainty, and the geopolitical landscape. Having a blend of assets can help smooth the performance of your portfolio because stronger returns in one area of your portfolio can offset weaker results elsewhere. In this context, we believe CPZ continues to be a strong choice for several reasons:

•Our ability to dynamically adjust our time-tested global long/short equity and multi-asset income strategies enables us to deftly manage the risk/reward characteristics of the portfolio over full market cycles.

•We look beyond the short-term noise to identify pockets of opportunity among innovative companies with quality fundamentals, those in thematic niches, and those that can demonstrate long-term resilience regardless of the macro backdrop.

CALAMOS Long/Short Equity & Dynamic Income Trust SEMIANNUAL REPORT   3

•In a rising-interest-rate environment, price-to-earnings multiples can come down even if earnings are good, so our team remains particularly mindful of valuations.

•In our dynamic income strategy, we follow a disciplined research process to identify securities we believe compensate us well for the risks taken.

Conclusion

As always, we thank you for your continued trust. To learn more about Calamos Investments’ views of the economy, markets and asset allocation, I invite you to visit our website, www.calamos.com.

Sincerely,

John P. Calamos, Sr.

Founder, Chairman and Global Chief Investment Officer

4   CALAMOS Long/Short Equity & Dynamic Income Trust SEMIANNUAL REPORT

Enhanced Fixed-Income and Total-Return Strategies

Calamos closed-end funds draw upon decades of our pioneering experience, including a long history of opportunistically blending asset classes in an attempt to capture upside potential while seeking to manage downside risk. Our closed-end funds can be broadly grouped into two categories: enhanced fixed income and total return. The funds share a focus on producing income while offering exposure to various asset classes and sectors.

CALAMOS Long/Short Equity & Dynamic Income Trust SEMIANNUAL REPORT   5

AVERAGE ANNUAL TOTAL RETURN^† AS OF 4/30/23

Performance data quoted represents past performance, which is no guarantee of future results. Current performance may be lower or higher than the performance quoted. The principal value and investment return of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Average annual total return measures net investment income and capital gain or loss from portfolio investments as an annualized average. All performance shown assumes reinvestment of dividends and capital gain distributions. Source: State Street Corporation and Morningstar Direct.

† Average annual total return measures net investment income and capital gain or loss from portfolio investments as an annualized average assuming reinvestment of dividends and capital gains distributions.

NOTES:

The 30%MSCIACWI(NR)-20%ICOS-50%BBGUSHY2%Cap Index is blended from 30% - MSCI ACWI Index (MXWD), 20% - ICE BofA US All Capital Securities Index and 50% - Bloomberg US HY 2% Issuer Capped Index.

The MSCI ACWI Index (Net) is a free float-adjusted market-capitalization-weighted index that is designed to measure the equity market performance of developed markets and emerging markets. The index is calculated in both US dollars and local currencies. Net return basis approximates the minimum possible reinvestment of regular cash distributions by deducting withholding tax based on the maximum rate of the company’s country of incorporation applicable to institutional investors.

The ICE BofA US All Capital Securities Index is a subset of the ICE BofA US Corporate and US High Yield Index including all fixed-to-floating rate, perpetual callable and capital securities, and fixed-rate preferred securities.

The Bloomberg US Corporate High Yield 2% Issuer Capped Index measures the performance of high-yield corporate bonds with a maximum allocation of 2% to any one issuer.

Index returns assume reinvestment of dividends and do not reflect deduction of fees and expenses. It is not possible to invest directly in an index.

6   CALAMOS Long/Short Equity & Dynamic Income Trust SEMIANNUAL REPORT

TOTAL RETURN* AS OF 4/30/2023

SECTOR WEIGHTINGS

Sector Weightings are based on managed assets and may vary over time. Sector Weightings exclude any government/sovereign bonds or options on broad market indexes the Fund may hold.

Long/Short Equity & Dynamic
Income Trust (CPZ)

INVESTMENT TEAM DISCUSSION

Please discuss the Fund’s strategy and role within an asset allocation.

Calamos Long/Short Equity & Dynamic Income Trust (CPZ) is a closed-end Fund that seeks to provide current income and risk-managed capital appreciation. The Fund provides hedged market exposure through Calamos’ time-tested global long/short equity strategy. In addition to offering an attractive monthly distribution, the Fund is supported by a multi-asset income strategy structured to be potentially less vulnerable to volatile financial markets by actively managing risk with dynamic asset allocation.

The Fund will typically invest at least 80% of its managed assets in a globally diversified portfolio of equity securities, including common stocks, preferred stocks, convertible securities and exchange-traded ETFs. At least 50% of the managed assets of the portfolio will be invested in the long/short equity strategy. The Fund may invest up to 20% of its managed assets in global income-producing securities, including high-yield and investment-grade corporate debt.

How did the Fund perform over the period?

For the six months ended April 30, 2023 (“semiannual period”), the Fund returned 2.29% on market price and 6.10%% on a net asset value (NAV) basis versus 8.07% for a comparator index comprising 50% Bloomberg US Corporate High Yield 2% Issuer Capped Index, 30% MSCI ACWI Index and 20% ICE BofA US All Capital Securities Index.

The Fund’s shares traded at a -14.01% discount to NAV on April 30, 2023. Portfolio returns coupled with a belief that the Fund was well positioned to generate income and deliver capital appreciation going forward served as an impetus to increase the Fund’s distribution rate three times, totaling a $0.0300 per share increase since inception. The Fund’s monthly distribution stands at $0.1400 per share as of April 30, 2023, which equates to an annualized distribution rate of 10.99% on market price. We believe that distribution increases are a way to enable shareholders to benefit directly from the returns of the portfolio.

How do NAV and market price returns differ?

Closed-end Funds trade on exchanges where factors other than the value of underlying securities can drive the price of shares. The price of a share in the market is called market value. Factors unrelated to the performance of the Fund’s holdings, such as general market sentiment or future expectations, may influence the market price. A fund’s NAV return measures the actual return of the individual securities in the portfolio, less fund expenses; it also measures how a portfolio manager capitalized on market opportunities. Because we believe closed-end funds are best used long term within asset allocations, we think that NAV return is the better measure of a fund’s performance. However, when managing the Fund, we strongly consider actions and policies that have the potential to optimize overall price performance and returns based on market value.

CALAMOS Long/Short Equity & Dynamic Income Trust SEMIANNUAL REPORT   7

Please discuss the Fund’s distributions during the period.

Within this Fund, we employ a managed distribution policy with the goal of providing shareholders with a consistent distribution stream.

The monthly per share distribution rate at the end of the period was $0.1400, up from $0.1100 at inception in November 2019 and representing a 27% increase. As of April 30, 2023, the annualized distribution rate was 10.99% on market price. We believe that the Fund’s distribution rate and level both remain attractive. With the yield on the 10-year Treasury offering 3.45% at the end of the period, and the dividend yield on the S&P 500 Index at 1.66%, the Fund’s 10.99% annualized distribution rate on market price on April 30, 2023, continues to compare favorably to both fixed income and equity alternatives.

What factors influenced performance over the period?

This past calendar year 2022 was distinguished by the reordering of the monetary agenda worldwide. This was highly disruptive for financial asset prices, which led investors to de-risk excessively because of fears of economic calamity. The latter thinking is symptomatic of one law of investment life: sentiment follows price. Accordingly, markets were forced to reprice financial assets in an environment to which they were not accustomed; one of rising interest rates. During the period, the Fed continued to increase rates, enacting three upward adjustments between December and March totaling 100 basis points in the aggregate, raising the range to 4.75%–5.00%.

By comparison, 2023 is a year of sharply lower inflation as the pandemic excesses recede and central bankers plan for a return to pre-pandemic price stability norms. Investors can embrace this benign outlook because they can believe (with good reason) that the Western world has not truly exited the deflationary era. In contrast to the trauma of 2022, today’s narrative of disinflation is supportive of equities as is usually the case.

The end of the period was distinguished by several bank failures that have reinforced the fear of many that a US recession is imminent as many recall the trauma of 2008. Some political fallout seems inevitable and the case for owning bank stocks is problematic, yet the US consumer is underpinned by some considerable momentum. This area of strength should not be ignored because it implies these financial shocks

SINCE INCEPTION MARKET PRICE AND NAV HISTORY THROUGH 4/30/2023

Performance data quoted represents past performance, which is no guarantee of future results. Current performance may be lower or higher than the performance quoted. The principal value of an investment will fluctuate so that your shares, when sold, may be worth more or less than their original cost. Returns at NAV reflect the deduction of the Fund’s management fee, debt leverage costs and all other applicable fees and expenses. You can obtain performance data current to the most recent month end by visiting www.calamos.com.

8   CALAMOS Long/Short Equity & Dynamic Income Trust SEMIANNUAL REPORT

can be weathered, as evidenced by global equity markets offering double-digit returns for the period.

We believe that 2023 is a year of transition as investors grapple with the reordering of the monetary agenda and the uncertainty around the post-pandemic price regime. There is a wide dispersion of reasonable interpretations regarding both topics. More than geopolitics, energy and China reopening, the future of inflation and monetary policy has taken center stage.

Given the crosswinds, it seems appropriate that our long book is balanced and diversified, emphasizing names where expectations have been lowered or where we believe demand will prove more sustainable post-pandemic than widely perceived (for example, consumer services and travel).

For much of the period, the Fund benefited from mounting evidence that service-related industries would remain stronger for longer as airline and hotel bookings remained robust and consumer spending more broadly kept apace. However, the banking crisis cast doubt on the sustainability of this strength, and investors rotated to quality and defensive names. This rotation was the primary vulnerability of our long portfolio during the period.

Long/Short Equity Strategy Performance Drivers

During the period we focused on cyclicals we believed were poised to outperform, given the post-pandemic pent-up demand in airlines, hotels, gaming, transportation and defensive stocks. Many of these areas proved to be accretive. Our hedge on the energy sector was also beneficial to returns as prices declined in related companies during the period. Our long portfolio realized gains from names positioned to benefit from exposure to artificial intelligence (AI) following the launch of ChatGPT. However, our general underweight of longer-duration technology stocks proved to be a drag on returns during the period because investors bought them during periods of market volatility.

We remain underweight in the poorest quality compartment of long-duration technology and high-multiple consumer staples but have maintained or increased exposure to mega-cap growth (quality GARP*).

While offering solid returns for the period, the Fund’s long/short equity sleeve underperformed relative to both the MSCI ACWI (Net) Index (+12.68%) and the S&P 500 Index (+8.63%) during the period because the sleeve did not fully participate in the select long-duration technology names that outperformed and are heavily weighted in equity indices. However, the sleeve garnered positive contributions from several sectors, chiefly long positions in information technology, consumer discretionary and communication services. Conversely, our short position hedges on the S&P 500 Index offered negative returns in the wake of equity market improvements for the period. In addition, our long positions in the consumer staples sector detracted from results for the period.

As of April 30, 2023, the long/short portion of the portfolio had a delta-adjusted net long position of approximately 60%, which represents an increase over the period.

We continue to take a cautious view on duration and its equity derivatives. This translates into the continued bias toward shorter-duration, more-profitable businesses versus those with less support from earnings, cash flow and tangible assets, or

CALAMOS Long/Short Equity & Dynamic Income Trust SEMIANNUAL REPORT   9

book value. We have been wary of stocks where the bulk of their value depends on assumptions about growth in the far future. This positioning sheltered the Fund from some of the most egregious stock disappointments of the period as markets struggled to price these assets in an increasingly inflationary environment. The Fund continued to favor names perceived as more cyclical with recovery potential during the year.

Dynamic Income Strategy Performance Drivers

Preferred Securities. The Fund’s preferred securities underperformed relative to the ICE BofA United States All Capital Securities Index during the period. Security selection among consumer discretionary companies contributed positively to returns. Conversely, security selection among financial companies weighed on performance.

High Yield. The Fund’s high-yield securities underperformed the Bloomberg US Corporate High Yield 2% Issuer Capped Index for the period. Security selection within several sectors supported absolute and relative returns, most notably in the health care sector. In contrast, the Fund’s security selection in communication services was a drag on returns.

Macroeconomic data and central bank policy responses dominated headlines and the market’s attention during 2022. Looking to the first quarter of 2023 and beyond, the focus has shifted. The failure of Silicon Valley Bank and the take-under of Credit Suisse in March left the markets fixated on systemic risks to the banking sector and the implications for the broader economy. Despite First Republic’s failure in late April, which happened in relative slow motion, the market appears satisfied that no systemic issue exists. This is in large part because of the active steps taken by regulators to shore up liquidity facilities and alleviate immediate stress. Central bank responses left little doubt that they view these recent events through a different lens than the collapse of Lehman Brothers in 2008 and the subsequent failures of financial institutions that ensued shortly thereafter.

Inflation remains stubbornly high. Although some are correct to highlight that headline measures are down 30%–35% across geographies, domestic core measures are only 10%–15% off peak levels and remain double the targeted rate of inflation. We expect that the encouraging downward trend in inflation data from the painfully high 2022 base levels will roll off in September, at which point further reductions in the year-over-year data will become more challenged and less pronounced. The persistent labor shortage is another issue the Fed will continue to wrestle with given that job openings are well off the all-time highs recorded last year, but with 1.6 job openings for each active job seeker, the labor equation is still unbalanced. Despite recent events, we expect overnight rates to remain higher for longer.

Risk markets held up quite well despite challenging developments as the high-yield market returned 6.2%, based on the Bloomberg US Corporate High Yield 2% Issuer Capped Index, driven by robust income and lower Treasury rates across intermediate maturities. Early earnings reports for the first calendar quarter of 2023 have been generally better than feared, supporting risk markets. While banks as well as several office and retail REIT bonds experienced losses for the quarter, all sectors except for communications delivered positive returns during the reporting period. Corporate credit spreads have seen greater volatility but ended the semiannual period within 10 basis points of where they began. The Bloomberg US Corporate High Yield 2% Issuer Capped Index closed the semiannual period with option-adjusted spreads at 452 basis points over like-maturity Treasuries and with a yield of 8.48%.

10   CALAMOS Long/Short Equity & Dynamic Income Trust SEMIANNUAL REPORT

Performance across credit quality during the reporting period was remarkably consistent. CCC-rated issuers led the way returning 6.4%, followed by BB-rated credits returning 6.3%, and B-rated paper returning 6.2%. At the beginning of the semiannual period, the trailing 12-month default rate was 1.6%, having increased from the all-time lows experienced during the pandemic. At the end of the reporting period, default rates had increased to 2.2%, still well below the long-term average of 3.0%. Regarding our general credit-quality positioning, an overweight position to out-of-benchmark BBB-rated bonds boosted performance, whereas security selection among our B-rated holdings was a detractor.

Please discuss how the Fund uses leverage.

Given the general improvement in financial markets that occurred during the period, our use of leverage was helpful to performance, despite escalating borrowing costs over the period. Leverage can offer positive reinvestment dynamics over time and has historically been beneficial to the returns of our closed-end Funds. Our percentage of leverage was 26% as of April 30, 2023.

How is the Fund positioned?

Long/Short Equity Strategy

Net equity exposure (delta-adjusted) increased from 52% at the start of the period to approximately 60% at its conclusion.

The start of 2023 witnessed a modest risk-on move through January as corporate earnings proved better than feared, the momentum of disinflation extended, and employment markets remained resilient. Fund performance has been predominantly driven by our larger positions in the consumer discretionary, information technology and communication services sectors.

The Fund maintained a modest equity risk through the period as markets became unsettled by higher interest rates, rising inflation, varied interpretations of central bank intentions, and Russia’s war on Ukraine.

The Fund continued to favor names perceived as cyclical with recovery potential during the year. The broadest exposures for the long book are industrials and transports, followed by financials.

The two major themes within technology have been slowing cloud services and excitement about the potential applications for AI following the launch of ChatGPT. The major cloud providers dominate both themes, and we are positioned accordingly. Investors began 2023 concerned about slowing demand for all three companies, yet attention quickly shifted to which of them stands to benefit the most by incorporating AI into existing and new product offerings.

Other technology stocks have been materially derated. The list of companies that have announced workforce reductions or lowered outlooks grew longer towards the end of the period. Still, estimates for most companies have not reset materially. More customers may pause initiatives following the banking crisis, bringing another step down in forecasts. Until this happens, we are reluctant to engage in names that are not supported by quality earnings and cash flow.

We continued to largely avoid high-multiple, long-duration software during the period. Investors wrestle with whether to fear the high-multiple growers or chase a recovery higher. We believe that these names will remain controversial because of changing

CALAMOS Long/Short Equity & Dynamic Income Trust SEMIANNUAL REPORT   11

views on rates and how much growth will slow in a recession. In a less accommodative monetary setting, few will ever recapture their peak multiples, although a sharp, short recovery is likely when the Fed pauses.

Outside of technology, the Fund favors names that will benefit from post-pandemic demand sustainability into 2024. The broadest exposure here is diversified industrials, transports, and select nonbank financials. The railroads are US-centric beneficiaries of supply-chain normalization and onshoring with limited exposure to labor and energy costs. In addition, we are constructive on select defense names.

The demand and pricing outlook for airfares is constructive because of changes on the capacity front. Higher financing costs, pilot shortages and equipment delays are making it difficult for the lowest-cost players to add undisciplined capacity. The recovery in corporate and international travel is gaining steam.

Energy remains problematic. The key swing factor will be China, which has been the primary source of consumption growth in recent decades. The setup for higher crude prices was ideal in 2022, yet the inability of markets to benefit from the fear of a war-related shortage points to a new dynamic in global oil markets.

Financials were a conflicted group entering 2023 given higher rates (good for net interest income) and fears of recession (bad for credit quality). Of course, events in March reprioritized these issues because investors realized resilient economic growth (good for credit quality) was bringing new competitive pressures for deposits. We entered the crisis with the long book exposed to US banks. Although reduced from the previous year, this positioning was painful given the magnitude of the downdraft.

Regarding China, its future remains challenged by its loss of manufacturing and the excessive debt associated with its real estate bubble, not to mention its geopolitical isolation. Its relatively muted GDP recovery in Q1 highlights that this is not the post-Covid recovery that America enjoyed. More generally, we remain wary of any global company that relies heavily upon a Chinese footprint whatever its form. We believe corporates will have to choose sides in this global rivalry regardless of their hopes to the contrary.

Long exposure to companies outside of North America was reduced from 12.4% at the end of October 2022 to 7.4% at the end of April 2023. This position is concentrated largely in banks, airlines and airline leasing, and select consumer discretionary companies. At period end, the long/short equity sleeve positions were exclusive to only North America and Europe.

Dynamic Income Strategy

In preferreds, our largest allocation was in the financials sector, specifically banks, which are taking advantage of higher yields on securities and loans to generate higher levels of net interest income. This positive momentum has been offset partially by lower capital markets activity, including underwriting, advisory and trading. Asset quality at banks and other finance companies remains strong, which is to be expected given high employment rates.

The Fund continues to invest heavily in institutional-style preferreds, which are typically fixed rate for five years and then reset coupons off of five-year Treasuries, helping mitigate interest-rate sensitivity. Vis-à-vis benchmark industry weightings, the Fund is underweight Insurance and overweight finance companies and energy. Over the semiannual period, the team has added to positions in the capital goods sector. Also, we reduced the portfolio exposure to the consumer non-cyclical sector.

12   CALAMOS Long/Short Equity & Dynamic Income Trust SEMIANNUAL REPORT

From a credit-quality perspective, the Fund is positioned with a relative underweight in all below-investment-grade rating categories with a corresponding out-of-benchmark allocation to BBB-rated debt.

In this environment, we believe the market’s pricing of multiple cuts in 2023 is too aggressive. However, we believe the market is looking through short-term developments in interest rates to eventual cuts that are more likely to occur in 2024, in our opinion. As such, we are shifting portfolio durations longer as the market has settled into lower-rate ranges, which are out of sync with our higher-for-longer policy rate view.

While we do not view a 2023 recession as inevitable, our view of macroeconomic activity should not be confused with complacency. We agree with the market that the next move for fundamentals is in a weaker direction, and the time to prepare for that environment is underway. We are actively reducing exposure to credits we view as more exposed to a downturn in cyclical activity, those with weak contingent liquidity, or those vulnerable to a rapid deterioration of asset value. We are maintaining allocations to select high-yield issuers that we believe are compensating us well for the risks taken as we follow our disciplined research process to identify value.

What are your closing thoughts for Fund shareholders?

The inflation surge resulted from the pandemic, like so much else across today’s economic landscape. It's our belief that as the shadow of the pandemic recedes, the inflation picture will appear to normalize, and Fed hawkishness will appear anachronistic. Despite investor fears, this positive story is reinforced rather than undermined by slowing economic activity and the occasional bank crisis.

Financial markets have concluded that this “slow-motion” pause by the FOMC is an inflection in monetary policy. When central bankers place themselves deliberately “behind the curve,” their policy moves are no longer leading indicators for financial assets. Markets will anticipate the belated shifts in policy.

To be clear, our interpretation is not one of persistently high inflation à la the 1970s. This is a forecast of price instability, in which inflation rates are much more variable than in the past quarter century. Amid price instability and cost-push pressures for labor, the setting is ripe for a comet tail of central banking errors of the kind witnessed over the past 15 months.

For now, this debate is ongoing. In any case, it is beyond the immediate horizon of markets. The momentum of disinflation is the visible narrative into summer. For this reason, our January message three months into the period is largely intact:

“As decelerating inflation exacerbates the inversion of US yield curves, the debate around an outright easing of Fed policy will intensify. Markets will be sensitive to this debate because it drives perceptions around recession risk.

“But there is no recession on the horizon. The risk is not that corporate profits collapse but that the profit cycle is mature, and the upside is modest. Valuations rather than earnings will drive markets in H1. We see a window of opportunity for equities, but the entry point was last September, and the risk/reward will be less favorable through H2.”

Our advice for clients is to enjoy the Interregnum of 2023. Sometime in 2024, we believe it will become apparent that the demise of a low and stable inflation regime is the principal discontinuity that began this decade.