Macroeconomic conditions and market performance.

A report from Apollo (Asset Managers) Chief Economist Torsten Sløk talked of the threat of stagflation in the US economy. He states that tariffs are typically stagflationary shocks as they increase the probability of stagnant growth as well as putting upward pressure on inflation.

Higher US tariffs will also likely have a substantial impact on the world economy, especially because the US is a net contributor to global aggregate demand – C+I+G+(X-M). This is in contrast to the 1940s, when US tariffs were also high, but the country had a trade surplus due to its dominant industrial position, wartime production, and post-war reconstruction efforts abroad.

One part of the report that I found very useful as a teaching resource was his explanation of market performance under different macroeconomic conditions. Below is the graph that show 4 possible scenarios.

Rates = interest rates S&P 500 = the stock market index tracking the stock performance of 500 leading companies listed on stock exchanges in the US.

Goldilocks – risky assets, including the stock market, tend to do well because neither inflation nor interest rates are a problem. This is actually quite easy as an investor—just buy risky assets. In particular, the stock market will likely do well because you have high GDP and low inflation, and business is good.

Overheating – the S&P 500 goes up, but interest rates are higher for longer. An overheating GDP means high inflation and therefore investments need to be good quality with companies being able to cope with higher interest costs. Low quality investments will struggle if interest rates are higher for longer.

Recession – simple investment scenario, because here you could just buy long-term government bonds. Rates will decline in a recession, so buying long-term Treasuries, for example, could be an effective strategy.

Stagflation – a unique combination of investment earnings going down and interest rates going up. The strategy here is to focus on companies that have sufficient earnings to protect themselves in the event of a recession. Investment in infrastructure, data centres, climate, and energy transition offer interesting entry points simply because of the turbulence in the market.

Source: Apollo – Mid-Year Outlook: At the Crossroads of Stagflation—What’s Next?

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