Macroeconomic Climate's Impact on Emerging Relationships
In the world of macroeconomics, a significant shift has been observed in the behavior of financial asset classes, largely due to the "new relationship" theory proposed by Karl Rogers, the Founder of ACE Capital Investments. This theory suggests that the long-term, loose monetary policy would alter the correlations between major financial asset classes.
The theory was primarily magnified by the Quantitative Easing initiative of the Federal Reserve, causing equities to keep rising and becoming overvalued. This overvaluation, coupled with the Fisher effect, led to a decrease in the attractiveness of equities, causing investment to shift to fixed income and other asset classes in an unnatural pattern.
The research, published in 2016, found that the relationship between the S&P 500 and the US 10-year Bond changed from a high negative correlation to a low negative correlation. This shift indicates that the bond market could either go up, down, or sideways when the equity market bubble bursts, potentially eliminating the equity correction protection for traditional asset class investors.
It is important to note that the loss of the highly negative correlation between the bond market and the equity market means that the traditional safeguards may no longer hold true in the current macroeconomic climate. For instance, in the past, when the equity market faced a correction, the bond market would typically rise as a safe haven. However, due to the "new relationship," this is no longer a given.
The research also found that monetary policy has become a significant driver of the equity markets. In the current macroeconomic climate, the US 10-year yield is around 1.88%, significantly lower than the historical average of 4.89%. This low yield indicates a highly accommodative monetary policy, which continues to influence the equity markets.
Before making any investment decisions, investors should consider the appropriateness of the information, seek independent financial and legal advice, and take into account their particular investment objectives, financial situation, and needs. It is crucial to remember that investment programs involve substantial risk, including the complete loss of principal. Past returns are no guarantee of future results.
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. It is also important to note that neither Karl Rogers nor ACE Capital Investments are affiliated with, or endorse, sponsor, or recommend any product or service advertised herein, unless otherwise noted.
As we move forward, the next post will delve deeper into how the "new relationship" and the current macroeconomic climate have affected multi-asset class performance during the past 10 years, specifically during the equity market bull-run. Stay tuned for more insights on this intriguing topic.
- Given the "new relationship" theory, the decrease in the attractiveness of equities may lead investors to reconsider their investing strategies, potentially shifting their focus to fixed income and other asset classes.
- As the research indicates, the loss of the highly negative correlation between the bond market and the equity market means that traditional safeguards may no longer provide equity correction protection for investors, requiring a reevaluation of investment strategies during the current macroeconomic climate.
