Ten years ago, Research Affiliates launched the Asset Allocation Interactive online tool, making our CMEs freely available to the public. With one full cycle complete, we can see what has worked well and where we can improve.
The 2022 broad market downturn across major asset classes came as a nasty surprise to investors. Historically, such an event is very rare, and no one was expecting to see almost all asset classes down for the year. Yet, even though it might seem as if diversification was of no help in 2022, the story changes if we look beyond the major headline asset classes.
Following Russia's invasion of Ukraine in the early months of 2022, and the subsequent sanctions imposed by the U.S., some investors were forced to liquidate their Russian investments. Many investors, uncertain about the potential scope of the coming war, also took the opportunity to liquidate their investments in all of Eastern Europe.
As the calendar closed on 2023, investors were once again treated to magnificent returns in their stock and bond portfolio.
Following a period of relatively calm asset markets from 2013-2019, in which the CBOE Volatility Index (VIX) averaged just below 15, volatility in asset markets has returned1 and investors have been looking for ways to protect themselves.
Higher interest rates and inflation are likely to usher in a decade of policy restraint, limited liquidity and macro volatility, pressuring equities and motivating investors to reconsider tactical asset allocation and embrace real assets.
Research Affiliates explain why their long-term return forecasts have risen across asset classes and the implications of their near-term outlook for U.S. recession.
US dollar cycles are long.
Rather than predicting what will happen to inflation in the future—a particularly arduous and humbling task—we ask a simple question: What can past inflation dynamics tell us about the equity market’s future returns?
We compare the current value of bonds versus stocks within the context of the equity risk premium. We couple this analysis with an evaluation of possible Fed policy direction. Our conclusion is that risk assets, such as US equities and corporate bonds, are poised to benefit as are gold and other commodities due to tumbling real yields and dollar weakening.
Massive growth in central bank balance sheets via quantitative easing, debt monetization, and firing of “big bazooka” stimulus packages brings renewed focus to potential shocks in the business cycle. An awareness of the macroeconomic “shocks” and their impact on asset prices should be incorporated in investors’ tactical asset-allocation decisions.
Major adjustments in capital markets around the globe have changed our long-term expected return forecasts for the 100+ assets we model. Before the corona crash we forecast long-term real returns for US equities to be only 1% a year. Now new, lower valuations suggest higher returns.
Research Affiliates examines how different asset classes perform across full market cycles, and discusses how macro forecasts inform its investment strategies.
Research Affiliates provides its outlook for 2020 and discusses where it sees attractive return opportunities across the globe.
Cam Harvey speaks to the currently inverted yield curve as an indicator of a slowing economy, further expounding on his Conversations of January 2019.
Cam Harvey looks at the yield curve today through the lens of his 1986 pioneering work on yield-curve inversions and their foreshadowing of economic downturns.
Evidence shows that the yield-curve slope and equity returns provide signals of similar direction in the economy, allowing investors to nowcast with relative confidence. Today, those signals indicate that several developed markets—in particular, Japan, Germany, and the United States—are ominously close to entering a correction phase.
Beware the consequences of assuming that elevated CAPE ratios are here to stay, but if they are the "new normal," low future returns are likely to be the "new normal" as well.
Part 3 Building Portfolios: Diversification without the Heartburn The wisdom of diversifying investor portfolios across a wide range of asset classes is indisputable. But diversifying client portfolios beyond mainstream stocks and bonds comes with challenges, starting with clients’ unfamiliarity with diversifying asset classes and a propensity for clients to regret diversifying when results disappoint.
When investors rely on any particular model all the time—and CAPE is often that model—fatigue inevitably sets in. We believe that a better approach for meeting future spending needs is to blend portfolios based on different models of return expectations.
Mean reversion is as applicable to trading costs as it is to valuation. Today’s costs to trade are at 56-year historical lows; they are due to rise soon. Now is the time to position your portfolio ahead of expected higher costs to trade and lower equity prices.
Now’s the time to get real. Now’s the time, in a world of paltry bond yields and meager dividends, to make an honest assessment of your portfolio’s long-term expected return.
