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
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.
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.
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