Karen Karniol-Tambour: How Durable is the Economy?

In this article, Bridgewater’s three CIOs discuss why the economic expansion is likely to stay durable even as it slows, why a sustained expansion with central bank easing isn’t as good for assets as it might seem, and the opportunities they see. In addition, Co-CIO Greg Jensen recently attended Bloomberg for a discussion on many of these topics (see the video below).

Here are the key takeaways:

Economic and Market Observations

• The economic expansion appears unusually durable, with spending driven by income growth, government borrowing, and business cash reserves rather than new private borrowing.
• Central banks are easing preemptively despite inflation still above targets, supporting the expansion’s durability.
• However, this environment may not be as positive for asset returns as it seems, given high equity valuations and an inverted yield curve.
• Inflation is likely to remain above target longer than expected, making it challenging for central banks to ease as much as markets anticipate.

Investment Implications

• Equities look marginally more attractive than bonds, but portfolios are already heavily positioned in equities.
• Opportunities exist in:
  • Adding investments that can perform well in economic downturns
  • Shifting to regions with different economic cycles (e.g., large Asian markets)
  • Earning equity risk premiums more efficiently
• Alpha generation is important in this environment, with opportunities in currency and bond markets, as well as within equities due to low cross-company correlations.
• Key research areas include AI impacts, inflation trends, central bank policies, and political changes affecting economic outcomes.