Gone are the days of low inflation and big stock gains: BlackRock

  • Gone are the days of ultra-low interest rates, low inflation and huge returns in the stock market, said a BlackRock strategist.
  • Nigel Bolton said investors can now expect higher inflation, higher rates and more volatile financial markets.
  • He said the past 10 years have been extraordinarily good for the markets, and now they’re returning to something closer to normalcy.

Since the 2008 financial crisis, ultra-low interest rates and central bank bond-buying programs have pushed up liquid financial markets. This drove assets up, while inflation was relatively low and steady.

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

Bolton told Insider that price hikes in 2022 and the coronavirus pandemic pushed the global economy into a new “order,” by forcing central banks to suddenly raise interest rates and companies to rethink global supply chains.

Bolton said investors can now expect a decade of higher inflation and lower yields. Many analysts describe it as a “regime change” in financial markets.

The old days are over

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

Central banks around the world cut interest rates to record lows in the wake of the financial crisis and bought trillions of dollars in bonds, lowering bond yields and lifting stocks. Even taking into account the 2022 decline, the S&P 500 is up about 500% from its 2009 low.

Investors have also enjoyed decades of stable inflation, with prices in the US rising 2.2% annually on average over the 20 years until the pandemic in February 2020.

However, Bolton said times have changed. Although inflation looks set to peak in the coming months, it is unlikely to fall back to its previous levels, he said.

“The chances of getting back into the system we’ve had in the last 10 years, from very low inflation, at 2%, I think that’s very unlikely.” Bolton said.

He said cheap labor from China has been a key factor in keeping wages and prices low, but workers there are on the verge of becoming scarcer as population growth slows.

Bolton said the global push to decarbonize economies is likely to push inflation higher, not least by raising prices for minerals such as copper that are used extensively in renewable energy.

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

“There are forces that were triggered by the pandemic as a result of this massive geopolitical shock that we are now facing and that will change the picture,” she said.

The look is more blurry

So what does that mean for investors? Bolton said stronger inflation would decisively mean higher interest rates.

“I think the returns for all asset classes frankly will be lower,” Bolton said. He said investors should now focus more on whether the stocks are a good value, rather than just piling on the fastest-growing tech names.

Extremely low bond yields in the past year have pushed investors into speculative corners of the market, spawning phenomena such as meme stocks and cryptocurrency. That trend is over, Bolton said, with rising interest rates and bond yields.

“The way I’ve been thinking is that the past 10 years have been extraordinary,” he said. “You had quantitative easing, and you had effective, inexpensive capital, roughly speaking, in many areas.”

He added, “I think we’re going back to a more normal environment, where there’s a bit more inflation, and interest rates have to go up and down. So there’s going to be more volatility around that macro environment which will lead to more volatility around the stock market.”

Leave a Comment