Risk Aversion Has Been 'Increasing Dramatically', Schwab's Aguilar Says

Summary

• Risk aversion among clients has increased dramatically over the past 2-3 weeks due to geopolitical conflicts and inflation concerns.
• Clients are feeling direct impacts in daily life, such as higher gas prices and potential inflation hits, driving a natural shift toward risk aversion.
• In uncertain times, a conservative and well-diversified approach is advised, avoiding extreme bullish or bearish positions to prepare for multiple outcomes.
• There is caution about a repeat of 2022, when positive correlation between stocks and bonds led to losses in both, complicating diversification.
• Fixed income markets are aggressively pricing in inflation, with expectations soaring in the US, Europe, and the UK, leading to higher yields.
• The market has shifted from anticipating easing monetary policy to pricing in rate hikes, potentially over 75 basis points.
• Economic conditions currently provide a floor for riskier assets, limiting the downturn in general market indices despite shocks.
• Longer conflict duration could significantly harm economic growth and GDP projections, with consumption being a critical driver.
• The current shock resembles a tariff-like supply disruption (e.g., from last year) rather than a broader economic downturn like 2022.
• The Fed may look through this if temporary, as hinted in DOT plots, but the market disagrees, expecting no rate cuts.