The stock-to-bond ratio is rolled over and investors are unprepared

This post was first published on Descending charts

  • Expect GDP growth forecasts to be trimmed down as extreme geopolitical unrest and price shocks threaten global economic recovery

  • Central bankers are caught between inflation and growth/equity market risks. Containing price increases will likely be their priority now that the United States is at full employment.

  • Investors remain too heavily positioned in equities relative to cash/bonds. We favor the latter group in the medium term given the current risk environment.

Stagflation fears were largely dismissed six months ago. Oh, how times have changed. Persistent and looming geopolitical risks have cast doubt on the duration of growth. Both of these trends suggest that the risk of a global economic recession has increased significantly in the past few weeks alone. Our flagship Weekly Macro Themes report explores the real possibility of a drastic slowdown in GDP growth over the course of the year.

Defensive in mind

Investors turned to defensive niches in the investment market despite this generally bullish time of year. stocks, commodities (including), cash and even bonds saw the money in. Still, investors remain somewhat aggressively positioned in the broader stock market.

Cash and bond allocations remain relatively low. Our featured chart illustrates how bold people are with their money, even with high volatility in 2022.

Featured chart: Investors continue to overweight equities

Stocks vs Bonds Relative Portfolio Positioning

Stocks vs Bonds Relative Portfolio Positioning

Positioning remains too bullish. This is a bearish sign

Investors say one thing and do another. The latest reading, which represents the average exposure to U.S. equity markets reported by its members, fell to the lowest figure in nearly two years. Generally, this can be seen as a bullish contrarian indicator, but if we don’t see allocations lining up, it’s less useful.

We observed a similar juxtaposition when it comes to feelings about inflation and consumer spending: people say they are furious with rising prices, but they spend as if the times had never been as good. Look what people do with their money and place less importance on how they feel.

Inflation high for decades – even ahead of the best week on record for commodities

Returning to our weekly report, we see that downside growth risks are intensifying. And it’s really started to pick up momentum given that commodities just had their best week ever, according to S&P data on FactSet. And now everyone knows it. are huge. Even non-investors see the soaring price signs of corner gas stations.

Additionally, coal, metals, agriculture and base metals are all booming. This will certainly eat away at corporate earnings and exacerbate inflationary pressures. Stagflation is on the table. Perhaps the silver lining is that these macro headwinds subside in the second half if cooler geopolitical heads prevail.

Equity Bonds

We reiterate our position and reinforce our belief that equities will underperform bonds in the coming months. The United States is the most susceptible to downside equity price risk given the massive rally it experienced last year relative to the rest of the world. Recent price action indicates a reversal of this previously bullish trend. And the data confirms this perspective – our report investigates Main economic indicators (LEI) and its relationship to future stock price developments.

Conclusion: We expect a bearish trend in equities versus bonds over the medium term. Slower or even negative growth in some regions, along with central banks caught between recession risks and massive inflation, are creating too many headwinds for risky assets. The catch is that investors just aren’t defensive enough yet.

Warning: Merged media would like to remind you that the data contained in this site is not necessarily real time or exact. All prices for CFDs (stocks, indices, futures) and Forex are not provided by exchanges but rather by market makers, and therefore prices may not be accurate and may differ from the actual market price, which which means that the prices are indicative and not suitable for commercial purposes. Therefore, Fusion Media assumes no responsibility for any business losses you may incur due to the use of this data.

Merged media or anyone involved with Fusion Media will accept no liability for any loss or damage resulting from reliance on the information, including data, quotes, charts and buy/sell signals contained in this website . Please be fully informed of the risks and costs associated with trading in the financial markets, it is one of the riskiest forms of investment possible.

Sallie R. Loera