Risk On, Risk Off
Few events can grasp the world’s attention in the same manner the pandemic and U.S. presidential election have. This attention also sparks conflict and discord—and thus, for some time, they’ve been identifiable risks as it pertains to financial markets.
The uncertainty that arises in relation to these two events is subsiding. The election is over and the roll out of vaccines has commenced.
For Wall Street and their forward looking estimates, greener pastures appear to be on the horizon. As a result, this has translated into record-breaking inflows into stock market funds near the end of 2020.
Stock Market Funds
In the week through November 11, 2020, $44.5 billion of stock market inflows were injected into markets through various funds—the largest weekly inflow into equity funds ever recorded.
The appetite for risk is also reflected in the options market, where call option volume is breaking all-time highs.
Taking a step back, here are the funds with the largest inflows in 2020:
|Ticker||Fund Name||2020 Net Inflows ($ Millions)|
|VTI||Vanguard Total Stock Market ETF||$32,623|
|VOO||Vanguard S&P 500 ETF||$21,431|
|BND||Vanguard Total Bond Market ETF||$17,217|
|QQQ||Invesco QQQ Trust||$16,733|
|VXUS||Vanguard Total International Stock ETF||$16,002|
|GLD||SPDR Gold Trust||$15,129|
|LQD||iShares iBoxx USD Investment Grade Corporate Bond ETF||$15,020|
|VCIT||Vanguard Intermediate-Term Corporate Bond ETF||$14,790|
|AGG||iShares Core U.S. Aggregate Bond ETF||$12,475|
|BNDX||Vanguard Total International Bond ETF||$11,929|
One Funds Inflow Is Another Funds Outflow
Gold and fixed income, which tend to thrive in times of uncertainty, saw net outflows during the same week. Fixed income in particular has fared worse. The spread between U.S. bond and U.S. stock ETFs is widening, with almost $3 trillion more dollars in stock funds.
As Wall Street re-evaluates for rosier forecasts ahead, this may further widen the growing gap between these respective assets. Despite a volatile year where markets whipsawed, the S&P 500 finished 2020 up 16%, a boost from its historical average of 10-11%.
How People Around the World Feel About Their Economic Prospects
In many of the world’s largest economies, including the U.S., Germany, and China, optimism around economic prospects sits at an all-time low.
How Countries Feel About Their Economic Prospects
Each year, the Edelman Trust Barometer report helps gauge the level of trust people place in various systems of power.
The report is also a useful tool to gauge the general mood in countries around the world—and when it comes to how people in developed economies feel about the near future, there’s a very clear answer: pessimistic. In fact, optimism about respondents’ economic prospects fell in the majority of countries surveyed.
Here’s a full look how many respondents in 28 countries feel they and their families will be doing better over the next five years. Or, put more simply, what percentage of people are optimistic about their economic circumstances?
|Country||% who are optimistic||All-time low?||Change from 2021 (p.p.)|
|🇰🇷 South Korea||39%||+6|
|🇿🇦 South Africa||66%||-2|
|🇸🇦 Saudi Arabia||73%||0|
Interestingly, nine countries (those with checkmarks above) are polling at all-time lows for economic optimism in survey history.
Whose Glass is Half Empty?
Japanese respondents were the most pessimistic, with only 15% seeing positive economic prospects in the near term. Only 18% of French respondents were economically optimistic.
While most developed economies were slightly more optimistic than Japan and France, all are still well below the global average.
As tensions between China and the U.S. continue to heat up in 2022, there is one thing that can unite citizens in the two countries—a general feeling that economic prospects are souring. As the U.S. heads into midterm elections and China’s 20th National Party Congress takes place, leaders in both countries will surely have the economy on their minds.
Whose Glass is Half Full?
Of course, the mood isn’t all doom and gloom everywhere. The United Arab Emirates saw a 6 percentage point (p.p.) jump in their population’s economic prospects.
Indonesia saw an 11 p.p. increase, and in big developing economies like Brazil and India, the general level of optimism is still quite high.
In some ways, it’s no surprise that people in developing economies are more optimistic about their economic prospects. Living standards are generally rising in many of these countries, and more opportunities open up as the economy grows. Even in the most pessimistic African country surveyed, South Africa, the majority of people still see improving circumstances in their near future. In Kenya and Nigeria, an overwhelming majority are optimistic.
One major prediction that experts agreed on for the year ahead is that economic outcomes will begin to diverge between countries with differing levels of vaccine access.
While this doesn’t seem to have affected attitudes towards economic optimism yet, it remains to be seen how this will play out as the year progresses.
The Accelerating Frequency of Extreme Weather
Extreme weather events, like droughts and heatwaves, have become more common over the years. But things are expected to get worse.
The Accelerating Frequency of Extreme Weather
The world is already witnessing the effects of climate change.
A few months ago, the western U.S. experienced one of the worst droughts it’s seen in the last 20 years. At the same time, southern Europe roasted in an extreme heatwave, with temperatures reaching 45°C in some parts.
But things are only expected to get worse in the near future. Here’s a look at how much extreme climate events have changed over the last 200 years, and what’s to come if global temperatures keep rising.
A Century of Warming
The global surface temperature has increased by about 1°C since the 1850s. And according to the IPCC, this warming has been indisputably caused by human influence.
As the global temperatures have risen, the frequency of extreme weather events have increased along with it. Heatwaves, droughts and extreme rainstorms used to happen once in a decade on average, but now:
- Heatwaves are 2.8x more frequent
- Droughts are 1.7x more frequent
- Extreme rainstorms are 1.3x more frequent
By 2030, the global surface temperature is expected to rise 1.5°C above the Earth’s baseline temperature, which means that:
- Heatwaves would be 4.1x more frequent
- Droughts would be 2x more frequent
- Extreme rainstorms would be 1.5x more frequent
The Ripple Effects of Extreme Weather
Extreme weather events have far-reaching impacts on communities, especially when they cause critical system failures.
Mass infrastructure breakdowns during Hurricane Ida this year caused widespread power outages in the state of Louisiana that lasted for several days. In 2020, wildfires in Syria devastated hundreds of villages and injured dozens of civilians with skin burns and breathing complications.
As extreme weather events continue to increase in frequency, and communities become increasingly more at risk, sound infrastructure is becoming more important than ever.
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