Stocks in persistently inflationary environments with better prospects

• Joseph Kalish, Chief Global Macro Strategist at Ned Davis Research, sees the global economy on a path to recovery.
• Capturing inflation may take longer than expected.

Vienna, April 25, 2024 / The global economy is on a path to recovery. While the USA is growing robustly, growth for most other major economies still lags behind the average. However, Joseph Kalish, Chief Global Macro Strategist at Ned Davis Research (NDR), expects a long way back to the 2% inflation target. He sees the return to it as a challenge, and the coming years could feel "like stagflation, with growth below trend and inflation above target." He presented his market outlook titled "Re-acceleration?" for 2024 and beyond at the invitation of Kathrein Privatbank at the annual Private Banker's Lunch for institutional investors on April 23.

Inflation remains persistent

"Ultimately, even a 5.25% interest rate hike and an inverted yield curve couldn't affect the US economy," summarized Kalish. The reason for this is the immense stimulus programs, which have also resulted in high budget deficits for the USA. These programs also prolong the path back to the 2% target inflation rate. Additionally, supply-side factors continue to favor price increases, especially high commodity prices, labor costs, rents, and supply chains prioritizing security over efficiency.

Outlook

What are the expectations for the capital markets? NDR's analysis suggests that a 60/40 portfolio in a growth environment with stable inflation could be well-positioned. Historically, initial interest rate cuts have almost always had a positive effect on the stock market. Bonds appear less attractive compared to stocks, especially Japanese bonds, which NDR would underweight.

In the coming years, the US dollar is likely to significantly influence asset returns. Gold, commodities, as well as bonds and stocks not denominated in USD, would benefit from a decline in the USD.

Kalish sees three main risks: an excessively long restrictive monetary policy that could also cripple the US economy, a loss of confidence in US institutions and hence reduced attractiveness of US government bonds, and the price decline in commercial real estate, which could pose a problem for numerous smaller US banks.

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