MacroResearchBoard

Important Shifts In The Macro Climate – September 7, 2021

A just-published report noted that there will be two important shifts in the macro climate over the next 6-12 months that point to lower investment returns and potential larger equity corrections.

First, while remaining stronger than many fear, global growth will continue to moderate in the year ahead after the blistering initial pace of recovery. Judging by the past economic expansion, investor confidence could periodically wobble as growth moderates.

Second, the Fed is signaling that it could begin tapering its asset purchases before yearend. In addition, there was fresh chatter last week from ECB members along the same lines. Notwithstanding Chair Powell’s emphasis that tapering will not portend the start of a rate-hiking cycle, many market participants are primed to interpret a reduction in net new monetary stimulus as monetary tightening. The U.S. and global economies can function comfortably with materially higher real interest rates over time, but that periodically may not be the case for stimulus-addicted investors.

Looking beyond the near term, our macro outlook favors a mild pro-growth tilt, supported by a still-improving global economy, but tempered by the likelihood of higher real bond yields and building inflation pressures. We recommend a maximum underweight stance on government bonds, where downside risks overwhelm expected returns. We remain broadly constructive on global equities, although there is increasing potential for market turbulence.