Welcome to my video presentation for Tuesday, January 18. For a condensed transcript, read the article below.

The new year started with volatility and downward momentum in the financial markets. Those choppy conditions continued last week, as fast-rising inflation seized center stage.

The U.S. Bureau of Labor Statistics reported last Wednesday that the consumer price index for all urban consumers spiked by 7% in the year through December, and the “core rate” (excluding food and fuel) by 5.5%. That’s the highest rate of headline CPI inflation since 1982.

This uncomfortably hot rate of inflation affects monetary policy, bond yields, consumer spending, and sector leadership. Let’s examine how you should position your portfolio under these conditions.

Much of the rise in the December CPI stemmed from durable goods inflation. Notably, prices of used cars and trucks soared on a year-over-year basis by 37%.

By spending more time at home, consumers have reduced their spending on services (e.g., traveling, visiting restaurants, going to movies, and exercising at gyms). Instead, they’re buying more durable goods (e.g., vehicles, household items, electronics, and sports equipment).

This shift in consumer behavior has put greater strain on the supply chain, causing shortages and fueling inflation.

The major U.S. stock indices finished last week in negative territory, as inflation and the Federal Reserve’s concomitant tightening weighed on sentiment. But oil prices rose, as investors continued to bet on economic growth and OPEC+ production curbs remained in place (see table).

I expect inflation to ease in the coming months, as supply chains get back to normal and energy prices plateau.

Stocks have been wobbly and bond yields hover at two-year highs, but we haven’t seen major equity selloffs, in large part because expectations for high inflation are priced into share prices and corporate profits remain strong.

Midcycle investing…

Fed officials are now calling for a hike in policy rates as early as March. With the recent drop in the unemployment rate to 3.9%, the Fed has leeway to tighten.

The imminent beginning of the Fed’s tightening cycle, the sixth over the last 40 years, is a watershed that represents not just hotter-than-expected inflation, but also the robust nature of the economic recovery and jobs market.

How should you calibrate your allocations? To pick the right sectors, you need to know where we stand in the business cycle.

Certain sectors of the economy have typically outperformed or underperformed the broader market, depending on the stage of the economic cycle.

The economic cycle is the rise and fall of activity, which historically has followed a recurring and predictable path. It starts with early expansion, characterized by rapid growth as the economy emerges from a downturn. Growth evolves into maturing expansion, as companies hire more workers, consumers spend more money, wages rise, and inflation kicks into gear.

We’re leaving the fast-growth early cycle. The Fed’s evolution from emergency stimulus, to tapering, to rate hikes indicates that the economic recovery has progressed to the midcycle phase (for details, watch my video).

The midcycle is typically the longest phase, characterized by moderate growth. Economic activity gains momentum, credit growth is strong, and corporate profitability is healthy. During the midcycle, sectors such as basic materials and industrials confer the best profit opportunities.

Now’s an opportune time to pocket gains (and avoid losses) from your aggressive investments that thrived during the fast-growth early cycle.

In the late cycle, which precedes recession, growth is slowing, and stock prices get dangerously overvalued compared to earnings. Sectors that historically outperform during the late stage include energy, health care and consumer staples.

My expectation is for markets to remain resilient in the coming months, albeit with bouts of choppy trading, even in the face of elevated inflation.

In the meantime, to guide you through these perilous times, our analysts have compiled a special report of seven shocking investment predictions for 2022, and how to profit from them. To download your free copy, click here.

John Persinos is the editorial director of Investing Daily. Send your letters to: mailbag@investingdaily.com. To subscribe to John’s video channel, follow this link.