The third quarter was another rough one for investors as stocks and bonds (again) both took a dive. With three consecutive quarters of poor performance now, it's time for investors to take stock and re-assess the investment landscape. Is the poor performance year-to-date just a rough patch to grind through, or is there something bigger going on?
What is going on?
In one sense, the events this year that got us to this point seem improbable and idiosyncratic. Inflation surprised a lot of analysts and policymakers. The Russian invasion of Ukraine came out of nowhere. The Federal Reserve got religion almost overnight and tightened monetary policy - and kept at it. Who, in their right mind, could have foreseen such an unlikely sequence of impactful events a year ago?
Unfortunately, this question, as understandable as it is, only addresses the specific outcome. In order to better understand what is going on, it is more useful to investigate the nature of the underlying conditions.
The Economist does exactly this in its recent special report on the world economy:
But even as monetary policy is on course to switch from stimulus to restraint, governments have moved in the opposite direction. During 2020 and 2021 they spent 10% of gdp supporting their economies and provided another 6%-worth of loans. Whereas after the global financial crisis of 2007-09 many quickly turned to trying to balance budgets in the belief that their debts risked becoming unsustainable, today they are continuing to borrow and spend, on everything from tax cuts to subsidising energy bills.
The Economist concludes, "a great policy reversal is under way in the rich world. The tight-fiscal, loose-monetary policy mix that defined much of the 2010s is being upended into a loose-fiscal, tight-monetary policy one."