Fixed income and equity markets in the US perform strongly during a monetary policy pause

Following the most recent meetings of the leading central banks, including the Federal Reserve and the European Central Bank, it is likely that the unprecedented tightening of monetary policy in the previous quarters has ceased.

From a tactical point of view, investors are currently faced with a (shorter or longer) transition period characterized by lower data dependency by central banks (and investors) and decreasing market volatility. Altogether, this should have positive implications for the financial markets.

The chart illustrates annual returns of fixed income and equity markets in the US during a period of monetary policy pause that is characterized by a wait-and-see approach of policy makers. Since 1992, these periods delivered average annual returns of 20.6% for US equity markets (S&P 500), while fixed income markets (Bloomberg US Aggregate Bond index) exhibited a yearly growth rate of 5.1%.

At Tramondo, the analysis of financial market cycles is a key input factor for our investment process. We use these analyses as a valuable source to determine our tactical asset allocation, particularly in relation to the risk characteristics of our investment products. There is no doubt that historical correlations cannot always be applied to a given financial market constellation, but empirical patterns help us to better quantify the probability of success of our investment decisions. There is no doubt that these market cycles (and their impact on different asset classes) cannot always be applied to a given financial market constellation. Nevertheless, empirical patterns and historical correlations unquestionably support us in evaluating the success probability of our investment decisions.

For a more comprehensive look at our take on the markets last month, please look at the latest market compass, which you can download on this page.