The days of low inflation and big stock gains are over: BlackRock

The days of low inflation and big stock gains are over: BlackRock

  • The days of ultra-low interest rates, low inflation, and outsized stock market returns are over, says a BlackRock strategist.
  • Nigel Bolton said investors can now expect higher inflation, higher rates and more volatile financial markets.
  • He said the last 10 years have been unusually good for markets and now they are returning to something close to normal.

Since the 2008 financial crisis, ultra-low interest rates and central bank bond-buying programs have pumped financial markets full of cash. Despite inflation being relatively low and stable, it is wealth driven.

But those days are over, according to Nigel Bolton, co-global head of equities at BlackRock, the world’s largest asset manager.

Rising prices and the coronavirus pandemic are pushing the global economy into a new “regime” in 2022, Bolton told Insider, forcing central banks to suddenly raise interest rates and companies to rethink global supply chains.

Investors can now expect a decade of high inflation and low returns, Bolton said. Many analysts are calling this a “regime change” in financial markets.

The old days are over

The last decade and a half has been a great time to put money in the stock market.

Central banks around the world cut interest rates to record lows and bought trillions of dollars of bonds in the wake of the financial crisis, lowering bond yields and raising stocks. Even with the 2022 drop factored in, the S&P 500 is up nearly 500% from its 2009 trough.

Investors have also enjoyed stable inflation for decades, with prices in the US increasing at an average of 2.2% over the 20 years until the pandemic hit in February 2020.

But Bolton says times have changed. Although inflation looks set to peak next month, it is unlikely to return to previous levels, he said.

“The chances of us going back to the regime of very low, 2% kind of inflation that we had in the previous 10 years, I think it’s very unlikely.” Bolton said.

Cheap labor from China has been a key factor in keeping wages and prices down, but workers there are becoming more scarce as population growth slows, he said.

Global pressure to decarbonize the economy could also push inflation higher, Bolton said, not least by raising the price of metals like copper, which are widely used in renewable energy.

Many other investment firms, and even central bankers, think a regime change is underway. European Central Bank President Christine Lagarde declared the end of the era of low inflation in July.

“There are forces that have been unleashed as a result of the pandemic as a result of this huge geopolitical shock that we’re facing now that’s going to change the picture,” he said.

Vision is unclear

So what does this mean for investors? Importantly, stronger inflation will mean higher interest rates, Bolton said.

“I think that frankly all asset class returns are going to be lower,” Bolton said. He said investors should now focus more on whether stocks are good value, as opposed to simply piling into the fastest-growing technology names.

Past ultra-low bond yields have driven investors into the speculative corner of the market, fueling phenomena such as meme stocks and cryptocurrencies. Bolton said that trend has ended, as interest rates and bond yields rise.

“The way I would think about it is that the last 10 years have been unusual,” he said. “You had quantitative easing, you had effectively costless capital, almost, in many cases.”

He added: “I think we’re just going back to a more normal environment, where there’s a bit more inflation around, interest rates are going to go up and they’re going to come down. So there’s going to be more volatility around. That macro environment and that leads to more volatility around the stock market. will go.”

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