In 2004, then-Fed chair Ben Bernanke gave a speech titled, "The Great Moderation."
His thesis: "One of the most striking features of the economic landscape over the past twenty years or so has been a substantial decline in macroeconomic volatility."
And while the Global Financial Crisis dented this belief, a post-crisis economic recovery and stock market boom brought these ideas back into vogue among many investors who rode a "stocks only go up" rally for more than a decade.
But with inflation at multi-decade highs and interest rates at their highest levels in over 15 years, some investors are saying that the old investing epoch has come to an end — ushering in a new era where fundamentals matter, traditional savers are rewarded once again, and the volatility that Bernanke said goodbye to is back.
In other words, choppier waters might be the new norm for a while.
There are a few things that are starkly different about this present business cycle, Liz Ann Sonders, chief investment strategist at Charles Schwab, told Yahoo Finance Live Wednesday.
First, there's the hot labor market, despite the white-collar layoffs. Historically, it's the lower-wage workers that are first in line to get cut.
"Yet another thing about this cycle that is just so different relative to past cycles," Saunders said.
To date, this downturn has been felt mostly at the upper ends of the wealth spectrum, with asset prices like stocks, bonds, and real estate suffering declines.
Meanwhile, inflation is a pernicious problem that disproportionately affects lower incomes. But it has not yet become entrenched — at least in the eyes of policy makers.
Investors may not know what to think, but Sonders expects the current fog to lift a bit when we get the next batch of quarterly reports in April. But it might not be a clarity worth celebrating. Analysts have already been lowering the bar for the first quarter earnings, and Sonders believes they have a ways to go considering the bond market is signaling the Fed needs to be yet more aggressive.
"One of the factors most highly correlated to corporate earnings is the 10-year [U.S. Treasury] yield, with a lag," she says.
Sonders believes the 10-year yield is forecasting the Fed will need to keep rates higher for longer, and that "the path of least resistance for [earnings estimates] is down" — targeting the first half of this year.
Whether or not that near-term pain materializes, Sonders closes the door on the prior epoch of declining rates and volatility, then describes what investors can expect in the years to come.
"I think that the end of the Great Moderation era is very much here ... Gone are the days of cheap access to goods, cheap access to energy, [and] cheap access to labor. I think all three of those ships have sailed," she says.
Sonders argues that reversing the engine of globalization and reorienting toward regionalism will have profound investing implications over the secular time frame.
"I would therefore expect greater inflation volatility, economic volatility, [and] geopolitical volatility. We're in this era of regionalization and demographic shifts that are pretty painful."
But as painful as these changes are for workers, consumers and investors alike, there are opportunities for investors. Consider that the Fed has finally raised short-term rates — the so-called risk-free rate — to levels that prevailed in decades prior.
"With the return of the risk-free [Treasury] rate, it's brought secular changes, including the fact that fundamentals are reattaching to prices," says Sonders. She goes on to explain that the market is no longer skewed so heavily toward mega cap stocks, and that there's hope for stock pickers once again after over a decade of underperformance.
"This has important implications and helps explain why equal-weighted [stock indices] have generally been doing better than [market] cap-weighted [indices] — why active [investing] has been doing better than passive [investing] — or at least is on a more level playing field with passive. And I think those are secular and as important backdrops for investors to think about."
What to Watch Today
Economy
- 8:30 a.m. ET: Q4 Nonfarm Productivity (est. 2.5%)
- 8:30 a.m. ET: Q4 Unit Labor Costs (est. 1.6%)
- 8:30 a.m. ET: Weekly Initial Jobless Claims (est. 195,000)
- 8:30 a.m. ET: Weekly Continuing Jobless Claims (est. 1,669,000)
Earnings
Before the bell: Best Buy (BBY), Macy's (M), Kroger (KR), Bilibili (BILI), Big Lots (BIG), Six Flags (SIX)
