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Mike Green: Passive Stock Market Edifice Put To The Test As Recession A Near Certainty
Forward Guidance
Market Dynamics Reveal Passive Strategies
An increasing reliance on fixed portfolio allocations, like target date funds, alters how investors react to market changes, particularly interest rate hikes by the Federal Reserve. When bond portfolios decline due to rate increases, investors are compelled to sell equities to rebalance their portfolios, disengaging from rational metrics like discounted cash flow analysis. This mechanical response creates a scenario where both stocks and bonds can exhibit positive correlation during sell-offs, deviating from the traditional negative correlation expected in stable markets. The market's response in 2022 highlighted this interplay, showcasing how investor behavior under the influence of passive strategies and Fed policies can shift market dynamics. As the Fed pivots towards supporting growth instead of merely fighting inflation, a return to negative correlation between bonds and equities may follow, reflecting evolving expectations of economic conditions and monetary policy.
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