The era of the Great Exasperation arrives for investors

The Great Moderation is dead, and the obituaries are now rolling in.

The past 30 years or so may not have felt like the best of times for investors. The financial crisis of 2008 was no fun, for instance, and even the Greek debt crisis tested nerves, to take just a couple of recent blow-ups. But in retrospect it was a golden period.

“The Great Moderation, a period of steady growth and inflation, is over, in our view,” the BlackRock Investment Institute wrote this week. It was, BlackRock said, a remarkable period of stability.

Barclays has also chimed in, marking the end of a “mostly calm and predictable macroeconomic backdrop” that has helped investors for three decades. In its place, the bank said, is “a new era of instability”. 

Another name for it might be the Great Exasperation.

The horror show in stocks is dragging on to its third consecutive quarter, and the stories fund managers tell themselves to try to understand the world (“narratives”, to use the grander term) are just constantly failing to stick. Rabobank describes it as “the maddening market pendulum”. 

The latest big idea — a bet on US recession — has stumbled at an early stage after the country produced surprisingly robust employment data.

That bet itself emerged to replace one on peaking inflation, which also fell apart this week when annual inflation came in at a scorching 9.1 per cent in the US. “Mea culpa,” said Ajay Rajadhyaksha, a rates strategist at Barclays. “Financial markets are very good at making analysts feel foolish, and that’s especially been true in 2022.” He had expected the Federal Reserve to respond to moderating inflation with smaller interest rate rises. But the inflation data “blew that out of the water”.

Bond yields, which set the tone across different asset classes, are swinging around on an alarming scale and with unusual frequency — 0.2 percentage points here, 0.2 points there. It doesn’t sound like much but these are wild scenes for debt markets. All asset managers can do is warn of more turbulence ahead.

The crypto market, for all its faults, has an answer to this sort of malaise. Backers of non-fungible tokens (those super-ugly pieces of digital “artwork”, often pictures of apes) have taken to hiring “chief vibes officers” or “directors of vibes” to keep the mood upbeat as the price of these baffling pictures declines, the Guardian reported this month.

“There are ways that you can . . . trade based on the momentum that is, for the most part, built on vibes,” one advocate said. OK. I guess if you are going to lose money, you may as well have fun in the process.

It is hard to imagine what form online cheerleading for the stock market might now take. High energy prices, the heavy weight of geopolitics and spells of volatility all make a case for “accelerating the green transition”, as Joachim Fels, global economic adviser to Pimco, put it, while accepting that this is weak sauce in a search for positive market triggers.

In the mean time, sentiment is dire. “Ouch,” wrote Mark Grant, chief global strategist at Colliers Securities, looking back at a grim time so far in 2022. “It has been a swim in some hellish inspired sea of red ink.” No chief vibe officer position for you.

“Ugh!” said Peter Tchir at Academy Securities, adding he feels like he is “banging my head into a wall”. Another potential director of vibes to cross off the list.

Other dispatches from analysts of late have come with titles including “depressed sentiment”, “peak anxiety”, “getting closer to breakpoint”, and possibly my favourite: “pain everywhere”. Everyone needs a summer holiday.

One of the solid gold rules of investment is to buy when everyone else is selling. Not this time. “We are bracing for volatility in this new regime,” said BlackRock. “Equities would suffer if rate hikes trigger a growth downturn. If policymakers tolerate more inflation, bond prices would fall. Either way, the macro backdrop is no longer conducive for a sustained bull market in both stocks and bonds.”

It stops far short of vibe management, but possibly the most constructive view of the week came from JPMorgan equity strategists. It said growth stocks could present “a tactical opportunity for a bounce”.

In part, that is because this year has just been so dire. US technology stocks have dropped nearly a third so far in 2022, and “beneath the surface, the sell-off has been even more dramatic”, says JPMorgan. More than half of Nasdaq stocks have dropped 50 per cent or more from their 12-month rolling highs.

All it would take is a period of stability in bond yields to help growth stock valuations, suggested Mislav Matejka at the bank. He stresses, though, that “this is a tactical call”, for the short term only.

Looking ahead, Dickie Hodges, manager of Nomura’s global dynamic bond fund, said in a note this week that “the rebound in risky assets will be significant and rapid” . . . when it comes. But that will not be until the Fed confirms it has got inflation under control. Don’t hold your breath for that. In the Great Exasperation, this is about as positive as it gets.

katie.martin@ft.com