Macro Signposts | 4 June 2024

This week we published our latest Secular Outlook, "Yield Advantage," by Richard Clarida, Andrew Balls, and Dan Ivascyn. It details our longer-term outlook for the global economy and markets over the next five years, along with investment implications. In summary, the post-pandemic inflation shock and rate-hiking cycle produced a generational reset higher in bond yields, creating a compelling multiyear outlook for fixed income as inflation recedes and risks build in other markets. Below are key takeaways from the outlook.

Secular Outlook Key Takeaways: Yield Advantage

The global economy continues to recover from pandemic aftershocks, including trade dislocations, outsize monetary and fiscal interventions, a prolonged inflation surge, and bouts of severe financial market volatility. At PIMCO's 2024 Secular Forum, we explored how the aftereffects of those disruptions are producing some unexpectedly positive developments while also introducing longer-term risks.

Among the positives, disinflation has occurred more rapidly than anticipated in most developed market (DM) economies. Moreover, macroeconomic and inflation risks look more balanced than they did at our prior Secular Forum a year ago. Central banks are also poised to pivot toward rate cuts, likely on different schedules.

However, we see three main areas where investors have benefited but may be overlooking risks that could develop over our five-year secular horizon:

  1. Large-scale fiscal stimulus has fueled recent standout U.S. growth, but that exceptionalism has come at a cost: The U.S. is on an unsustainable debt trajectory that the government will ultimately need to address. Meanwhile, financial markets may increasingly need to operate without expectation of government support.
  2. Artificial intelligence (AI) is poised to realign labor markets and boost productivity, but significant economic impacts may take years. Massive capital investment has accompanied rapid stock market gains in ways reminiscent of past tech booms.
  3. Asset valuations in some markets offer investors little apparent cushion. This includes equities, where valuations appear stretched, and lower-rated corporate direct lending markets that are less liquid and more exposed to floating interest rates.

For investors, the early 2020s inflation shock and steep policy rate hikes produced a generational reset higher in bond yields, which now embed significant inflation-adjusted cushion. Starting yields are highly correlated with five-year forward returns. That supports an attractive long-term outlook for fixed income returns as inflation recedes, particularly on a risk-adjusted basis relative to other assets. Opportunities across global bond markets also appear uncommonly attractive and diverse, with active country and security selection being key.

We believe this secular backdrop merits a rethinking - and even a reversal - of the traditional 60% stocks / 40% bonds asset allocation paradigm.

As banks retreat from certain markets, we also see attractive opportunities in asset-based lending, particularly consumer-related areas given the strength of the U.S. consumer. We expect bank disintermediation and capital needs will create opportunities in commercial real estate (CRE) debt.

Our Secular Forum sessions explored how the U.S. and China are leading a shift toward a multipolar world order that is likely to alter market and policy dynamics. The peace dividend that countries enjoyed in recent decades is turning into a conflict expense that could be a disruptive force.

For details on our outlook for the global economy and investment implications, read the full Secular Outlook, "Yield Advantage."

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We welcome your questions about the global macro landscape. Don't hesitate to suggest themes or data for us to analyze and discuss: Please email [email protected].

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All investments contain risk and may lose value.

Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision. Outlook and strategies are subject to change without notice.

This material contains the current opinions of the author and such opinions are subject to change without notice. This material is distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

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