MacroResearchBoard

Extraordinary Times – May 2, 2022

A just-published report examined a number of topical investment issues, following what has been an extremely disruptive past few months in global financial markets. Interestingly, the global stock/bond ratio has not given up much ground despite sizeable equity losses, benefiting our bias for stocks over bonds. The resilience of the ratio reflects an atypical macro backdrop compared with recent decades.

Although global equities have declined this year, they are roughly unchanged over the past 12 months, consistent with our neutral weighting in a multi-asset portfolio. However, the breakout in inflation after several decades of being in hibernation has been the new twist and has crushed bond positions, consistent with our underweight allocation to fixed-income in multi-asset portfolios. The catalyst for the recent risk-off phase was not misguided monetary tightening as some argued in late-2018, i.e. hiking policy rates without a true inflation problem. Rather, the current equity slide reflects an actual inflation problem that, belatedly, triggered expectations of a sharp monetary response and massive bond market losses.

Our view that global growth will be stronger than the consensus expects means that we continue to favor stocks over bonds on a 6-12 month horizon, but investors should be on guard for the opposite outcome in the very near run until global growth anxieties subside.