Assessing the Nuances in an “Out of Sample” World

Cornerstone Macro

Research

14 Pages

Cornerstone Macro examines why traditional market relationships became less reliable after the financial crisis, arguing investors were operating in an unprecedented macroeconomic environment. It contends that zero interest rates, austerity, and subdued inflation shortened market cycles, while global disinflation supported a renewed preference for cyclical equities.

Key Takeaways

Out Of Sample: Traditional models were calibrated for roughly 5% Fed funds rates and double digit government outlay growth, making them less reliable under ZIRP and austerity.
Shorter Market Cycles: Since 2010, markets experienced 4 complete risk on and risk off cycles, with average phases shrinking from over 1 year to just over 2 quarters.
Global Disinflation Benefits: Japan posted 3.5% Q1 growth while the Nikkei gained over 75% since November, helping strengthen the U.S. dollar and restrain inflation pressures.
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