From Abundance to Austerity: Why the Next Decade Won’t Be Like the Last

Key Points

  • Extended periods of zero interest rates combined with expansive fiscal policy enabled investors to amass plentiful capital to withstand the most rapid tightening cycle in 40 years.

  • The current equity selloff could be an inflection point in the transition from a decade of abundance to one of austerity that pressures securities prices as economies normalize and markets seek equilibrium

  • Higher interest rates and inflation are expected to persist, amplifying the risks of U.S. budget deficits on GDP growth and limiting the Federal Reserve’s ability to stave off recession.

  • The return of macro volatility should motivate investors to reconsider tactical asset allocation. We believe value stocks, real assets as well as emerging market equities and local currency debt are well suited for such an environment.

A U.S. economic downturn that seemed a foregone conclusion at the start of 2023 — what some have dubbed “the most anticipated recession ever”— has yet to fully materialize. Cracks continue to appear, but so far those have yet to coalesce. Many, including us to some extent, underestimated the resiliency of the economy and capital markets, given the plentiful liquidity and accommodative policy environment since the Global Financial Crisis. For starters, the Federal Reserve adopted a zero-interest rate policy for 10 of the last 15 years, the most recent easy money period ending in March 2022. Expansive fiscal policy, most notably in response to the COVID-19 pandemic, further enhanced liquidity, providing the foundation for investors, homeowners and corporations to amass a war chest of capital to withstand the effects of the most rapid tightening cycle in 40 years.