The (not so) great escape

In breve

Late summer turning sour. As 3Q23 ends, there is a feeling of ‘déjà vu’, with stocks and bonds selling off in tandem, like they did 2022 (see charts below). This is in contrast with the 1H23 market dynamics, when bond and stock prices mostly moved in opposite direction, with the latter outperforming. A positive correlation often reflects monetary policy dominance, while negative correlation is typical of cyclical and risk appetite dominance.


  • By early summer, investors looked increasingly confident that the global economy was escaping the plague of stagflation. They are having a second thought – rightly so. The US economy has been exceptionally resilient to the 525bp Fed tightening but is now showing signs of fatigue. Surging oil prices may keep inflation high for longer. 
  • Market pricing seems disconnected from the significant economic and financial stability challenges associated with the delayed effects of massive rate hikes and ongoing Quantitative Tightening (QT). Risk asset volatility is too low, and earnings consensus too high. The rise in global equity multiples has made earnings yields unattractive relative to money market rates and bond yields. 
  • Our tactical asset allocation recommendation thus includes a preference for the safer segments of Fixed Income over Equity and High Yield. The key risk to our views lies in another supply shock causing higher energy prices into the all-important EU and US elections next year, and elevated bond yields for longer. Our medium-term views are more constructive for bonds and stocks, as the Fed will mull rate cuts by mid-2024.

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The (not so) great escape

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