Markets, macro and the 60/40: Insights from Jurrien Timmer

Markets climb the wall of worry

Markets have shown relative calm following a volatile period driven by tariff headlines and shifting trade narratives. After a 21% decline and a subsequent 23% rebound, investor sentiment remains cautious, reflecting a classic “wall of worry” scenario. Despite geopolitical noise, markets appear to be pricing in a manageable level of risk, particularly around 10% tariffs.

Earnings and valuation dynamics

Earnings estimates, while previously revised downward due to tariff concerns, are beginning to stabilize and even tick upward. This suggests that markets may not have fully priced in worst-case scenarios and are now adjusting to a more balanced outlook. However, rising bond yields—particularly the 10-year yield hovering around 4.46%—pose a potential cap on equity market rallies.

Sentiment and insider activity

Investor sentiment remains subdued despite market recovery, a potentially bullish contrarian indicator. Corporate insiders have been buying at recent lows, which could potentially reflect their confidence in market fundamentals. Historical comparisons suggest that while the current cycle lacks a central bank pivot, it may still benefit from policy adjustments and improving credit conditions.

Bond market and fiscal pressures

The bond market is increasingly influential, with rising term premiums reflecting fiscal expansion and reduced central bank intervention. While inflation expectations remain contained, any potential shift could push yields above 5%, which may impact equity valuations. The return of the Fed Model—comparing bond and equity yields—highlights the growing competitiveness of bonds relative to stocks.

Liquidity and global capital flows

Global liquidity is expanding, with money supply growth supporting equity valuations. However, this also raises concerns about inflation and fiscal dominance. A shift from globalization to mercantilism could reduce foreign capital inflows into U.S. markets, potentially eroding the long-standing U.S. valuation premium.

U.S. vs. International Equities

While U.S. equities remain strong, international markets—particularly the MSCI All Country World Index ex-U.S.—are showing signs of life, reaching new highs for the first time since 2007. This indicates a potential mean reversion opportunity, with non-U.S. assets offering alpha potential.

Policy and fiscal outlook

Proposed tax changes targeting foreign dividends and treasuries may deter international investment, further challenging U.S. market dominance. Meanwhile, meaningful U.S. debt reduction appears unlikely, with policymakers instead aiming to outgrow the debt through nominal GDP growth exceeding bond yields.

Rethinking the 60/40 portfolio

Timmer suggests evolving the traditional 60/40 portfolio into a 60/20/20 model. While equities remain the core, the bond allocation should be reduced in favor of uncorrelated assets such as absolute return strategies, gold, Bitcoin, and market-neutral funds. These alternatives offer diversification and resilience in a regime where bonds may no longer serve as effective risk mitigators.

Conclusion