And today’s environment also should be good for both developed and emerging market stocks, although the performance of the latter will be somewhat dependent on the future path of monetary policy. As we write in the paper, my research team has found that the sweet spot for (monthly) developed equity performance has been a combination of global economic expansion and declining US inflation. Meanwhile, emerging market stocks generally tend to perform best in environments of falling inflation.
To be sure, factors beyond the direction of growth and inflation impact near-term returns. Both monetary and fiscal policies play a key role in setting the direction of asset classes. They not only have both a direct and indirect impact on a country’s future growth prospects, but they also influence investor sentiment. In particular, an unambiguous, pro-growth policy mix is generally viewed as supportive for risky assets, while increased policy uncertainty could hurt risky assets. As such, Washington-related fiscal policy uncertainty is currently fueling market volatility and muddying the return picture a bit, and Fed-induced liquidity is also wielding an impact.
Still, as my group’s research shows, the direction of economic growth and inflation levels can still affect short-term returns. And that we’re in an environment where inflation is not a threat and the global economy is continuing its slow recovery is more support for the case for equities over bonds.
Source: BlackRock Investment Institute, Investment Strategy Group research
Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock and iShares Chief Global Investment Strategist. He is a regular contributor to The Blog and you can find more of his posts here.