MacroResearchBoard

Global Stocks Should Outperform Bonds, If… – May 8, 2023

A recently-published report argued that there is little precedent for the global stock-to-bond (S/B) total return ratio to deviate directionally from bank stocks on a sustained basis. Indeed, even the divergence since early-2022 is an anomaly in recent decades. MRB believes the core U.S. and euro area elements of the global banking system are healthy, but bank stock prices will almost certainly need to stabilize or rise anew if the global S/B ratio is to continue to advance.

The investment outlook is complicated by fundamental crosscurrents. U.S. recession fears linger, but hard data are consistent with a resilient rather than faltering economy. Investors will remain jittery in the near term given economic and policy uncertainty, as well as lingering but overblown bank worries. Central banks will likely soon pause their interest rate hiking cycles, which will help extend the economic expansion. While already discounted, even a pause will be supportive of equities, bonds, credit and other risk assets.

Investors will likely remain jittery in the near term given economic and policy uncertainty. That said, our constructive macro outlook points to the continuing outperformance of stocks relative to bonds, although the path will likely be choppy and total upside limited given the mature stage of the global economic expansion.