Inflation adds to risk-off sentiment
The year 2023 had started with rising optimism for disinflation and expectations for interest-rate cuts by the Federal Reserve. Data releases in February indicated that the U.S. economy is resilient, but unfortunately also that inflation is sticky. The market quickly priced out quick rate cuts and priced in more hikes. As rates rose, risk assets sold off.
This 10-year illustration captures the cyclicality of investors' appetite for risk.
March '16–Jan '18
Risk assets rally amid improving commodity prices, perceived stability in China's macro data, and expectations for gradualist Fed policy.
March '20–Dec '21
Easy monetary policies and reopenings supported risk assets.
Central bank tightening expectations along with the Russia-Ukraine crisis raise market volatility.
Source: Putnam. Data as of February 28, 2023. To create the Global Risk Appetite Index, we weigh the monthly relative returns of 30 different asset classes over 3-month T-bills relative to the trailing 2-year volatility of each asset class. The higher the relative return and the lower the volatility, the greater the risk appetite; conversely, the lower the relative return and the higher the volatility, the stronger the risk aversion.
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