I’ve long been advocating that investors should overweight equities relative to bonds, and while equity valuations are no longer at their cheapest and there are risks inherent in stocks, I still hold this view. In fact, all the factors I look at, including the economic backdrop, inflation trends, monetary policy and corporate fundamentals, suggest that investors should still consider overweighting equities.

Still looking for more insight into how the economic backdrop and inflation play into my preference for stocks? A new BlackRock Investment Institute paper I co-authored is a good source.

In the paper, “Risk and Resilience: Patterns in Equity Returns,” my fellow authors and I write that the direction of global economic growth (expansion versus contraction) and the direction of US inflation (rising or falling) together matter for the near-term returns of various asset classes.

In particular, we show in chart form how different asset classes performed monthly under four different economic growth and inflation scenarios between 1988 and 2013. As the chart below shows, equities tend to outperform bonds on a monthly basis in a scenario like the one we’re in today: expanding (albeit slowly expanding) growth and falling, or muted, inflation. One reason that expanding growth and muted inflation supports equities is that monetary policy is likely to remain accommodative when there’s a remote risk of inflation.

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