Noble Apex News

Rising hopes of a Goldilocks scenario have been supportive for stocks this year. The strong rebound since last September’s market trough has been almost entirely driven by multiple expansion. The rally has been fuelled by a combination of rising valuations and improved earnings expectations as the risks of an energy supply crunch have faded. An economic downturn still seems the most likely scenario to rid developed economies of their inflation excesses. But lower inflation, by definition, means lower corporate pricing power.

Investment markets are off to a good start. China’s reopening, moderating US inflation and firming expectations of smaller interest rate hikes by the Federal Reserve have seemingly prompted a turn in market sentiment. Among investors, some may be considering the prospect of dialing up risk in portfolios to make the most of the recovering market sentiment. Yet there are risks ahead. Aggressive monetary policy tightening has increased the risks of a downturn in the US, while China may be facing some challenges in the transition towards living with COVID-19. Elevated economic uncertainty may keep markets volatile for some time.

For much of the past decade, the ability of bonds to offer either of these was steadily diminishing. A long bull market compressed yields to record low levels, forcing investors to make an unenviable choice: accept paltry returns by investing in government bonds at ever lower yields, or chase higher yields in lower quality parts of the fixed income universe and take on much more risk as a result?

Some people may want to keep as much cash on hand as possible as they believe there won’t be a steady stream of income for life in retirement. The likely erosion of capital amid market volatility could also cause them to shy away from risk assets. While this may ring true for some people, the return on cash is relatively low and may be insufficient to support a life in retirement if they do not work harder to build their wealth.