One week / one topic: A fall from grace for Equities

What happened?

As of last week, global equities entered a ~5% drawdown from recent all-time highs.

Renewed US inflation pressures and geopolitical tensions were identified as the alleged culprits, and notably even the Nasdaq and AI darlings such as Nvidia were down -5% and -14% respectively for the week.

While the magnitude of the index-level drawdown still falls under ‘business as usual’ for now, the lead-up to it was actually quite extraordinary: not only global stocks rallied ~27% in six months, but they also went up essentially in a straight line.

For context, stocks went up for 20 out of 22 weeks and never suffered a drawdown of more than 2% along the way. If you were positioned correctly, it was fun while it lasted.

Our observations

• Fundamentals: Stubborn US inflation might indeed delay any rates cuts and equities were certainly not ‘cheap’ to begin with. Earnings announcements have been ok so far, but sky-high expectations remain a challenge.

• Price action: Volatility tends to cluster and Equities-Bonds correlation has turned positive once again. Probabilistically, we’d expect a bumpier ride from here and diversification is key.

• Investor beliefs: Perhaps frustratingly, we are not (yet?) detecting extremes in investors’ mindsets. A full comeback of the ‘higher for longer’ narrative could however generate opportunities to increase duration.

So what?

While we maintained moderately constructive Equities positioning during Q1, we also laboriously resisted the temptation to reduce government bonds as they were lagging other assets.

Since inevitably “we don’t know what we don’t know”, maintaining reasonable duration in portfolios still feels like a prudent approach despite the undeniable diversification challenges of the post-Covid period.