Economic interplays and new alliances amidst the present economic landscape
In the ever-evolving world of finance, Karl Rogers, the founder of ACE Capital Investments, has been at the forefront of identifying significant shifts in the macroeconomic landscape. One such shift, as per his 2016 hypothesis, is the emergence of a "new relationship" that has altered the dynamics between major financial asset classes.
This "new relationship" is believed to be a byproduct of prolonged and accommodative monetary policies, such as the zero lower bound policy, which has led to an increase in the money supply. The author's research suggests that this increase has pushed the economy into a liquidity trap, a term often used to describe an economic situation where the low interest rates fail to stimulate economic growth.
In the current macroeconomic climate, the US 10-year yield stands at around 1.88%, significantly lower than its historical average of 4.89%. This low yield environment, combined with the "new relationship," has led to a significant change in the correlation between the S&P 500 and the US 10-year Bond. Whereas the relationship was previously characterised by a high negative correlation, it has now evolved into a low negative correlation.
This loss of the highly negative correlation between the bond market and the equity market means that traditional asset class investors and managers may no longer have equity correction protection. In simpler terms, the bond market may no longer act as a safe haven when the equity market experiences a downturn.
In the current macroeconomic climate, the bond market is closer to being uncorrelated with the equity market, which means it could either go up, down, or sideways when the equity market bubble bursts. This unpredictability presents challenges for traditional asset managers who rely on the traditional correlation between these two markets.
Investors may need to adjust their portfolios to new inflation and growth expectations, regulatory changes, or unconventional monetary policies. The "new relationship" and the changed macroeconomic climate could disrupt traditional asset class behaviour, requiring investors to reassess their strategies and risk profiles.
It is important to note that investment programs offered by ACE Capital Investments involve substantial risk, and investors should consider their appropriateness and seek independent financial and legal advice before acting on any information. The views expressed in this article are those of the author and do not necessarily reflect the views of AlphaWeek or its publisher, The Sortino Group.
As we move forward, the author's next post will delve deeper into how the "new relationship" and the changed macroeconomic climate have affected multi-asset class performance during the past 10 years, before getting into an equity market correction. Stay tuned for more insights on this evolving landscape.
Investors, in light of the emergence of a "new relationship" between major financial asset classes and the subsequent changes in the macroeconomic landscape, may need to reconsider their investment strategies. For instance, the low yield environment and altered correlation between the S&P 500 and the US 10-year Bond could challenge traditional asset managers who rely on the traditional negative correlation between these two markets. Therefore, adjusting portfolios to accommodate new inflation and growth expectations, regulatory changes, or unconventional monetary policies may be crucial for maintaining financial health in the current climate.
