ARTICLE | 4 MIN | VIEWS FROM THE FLOOR

Today’s Economy Mirrors the Fragility of 2010 and 2020

April 1, 2025

While the global economy is not in full crisis mode yet, there are echoes of past recessions. Also, there’s a haven for investors bruised by the Magnificent Seven. 

The current economic landscape bears the greatest resemblance to late 2010 and mid-2020; both periods of fragility, when uncertainty dominated, and fears of worsening conditions loomed. It’s not fully in crisis, but confidence is in short supply.

Back then, the global economy was emerging from two of the biggest crises in recent history: the Global Financial Crisis and subsequent recession and COVID. Conditions in April 2025 are not an exact replica of those periods, but they carry echoes of turmoil and vulnerability, our analysis of historical market regimes shows. It also shows the current environment has the least in common with the third quarter of 2018, which was characterised by robust global economic growth.

The S&P 500 has just capped its worst quarter since 2022, as US president Donald Trump escalates global trade tensions. The resulting uncertainty and sticky inflation are driving business and consumer confidence downward. This is a far cry from the investor exuberance that greeted his re-election in November 2024. Back then, markets expected a pro-business agenda and Federal Reserve interest-rate cuts to shore up economic growth.

Going defensive

During periods when macroeconomic forces drive market returns, we turn to our proprietary macro timing models for deeper insights into the prevailing environment. Macroscope, our systematic model, analyses past market regimes to interpret future trends by examining risk factors and sector dynamics. This approach allows us to uncover recurring patterns and anticipate how current macro conditions might interact with political developments.

Macroscope’s defensive positioning reflects the current fragility, focusing on Quality and Value while avoiding unnecessary risks.

Figure 1. Our Macroscope model has trimmed exposure to Momentum

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The model has reduced its exposure to Momentum, anticipating the risks of unwinding frothy valuations. It remains bullish on high-quality large-cap stocks and favours Value factors such as earnings yield and book-to-price. Risk-oriented factors like residual volatility and beta are out of favour as Macroscope positions cautiously for a volatile environment.

From an industry perspective, cyclical industries such as gold, metals and semiconductors were least favoured by the model in anticipation of uncertainty arising from the trade war. The model, however, prefers defensive industries such as pharmaceuticals, utilities and consumer staples.

As we keep saying, history doesn’t repeat itself, but it often rhymes. As the global economy grapples with volatility and unpredictability, the model advises caution, preparing for both the challenges and opportunities ahead.

 

The Quiet Winner of the Magnificent Seven Meltdown

Last month, Goldman Sachs rechristened the Magnificent Seven as the Maleficent Seven. Once hailed as the driving force behind the S&P 500’s consecutive 25%+ gains in 2023 and 2024, these tech giants have now become emblematic of the market’s recent sharp correction, with US$1.5 trillion wiped off their valuation.

Despite initial predictions of the highest S&P 500 returns in over a decade, post-US election optimism quickly faded as the realities of Trump’s protectionist tariff policies soon weighed on investor sentiment. Weaker-than-expected consumer data prints compounded investor woes and ignited a sell-off that saw the S&P 500 enter correction territory and exposed the fragility of a market heavily concentrated in a handful of megacap stocks.

Amid the turbulence, the MSCI World Minimum Volatility (MSCI Min Vol) Index has captured gains, underscoring its defensive qualities in an increasingly unbalanced market. Since February, when market weakness began to emerge, the index has gained 3.7%, whereas the MSCI World Index and the Magnificent Seven Index1 have declined by 5% and 14.4%, respectively.

Low vol to the rescue

Low volatility equity strategies aim to exploit the observed anomaly whereby stocks with a lower beta to the market tend to deliver higher risk-adjusted returns to higher beta stocks over the long run, contrary to the predictions of the capital asset pricing model (CAPM).

Portfolio construction techniques for low volatility equity strategies typically involve an optimisation process that seeks to minimise portfolio risk based on estimates of stock correlations and volatility. This optimisation process is usually accompanied by constraints designed to avoid unintended biases, such as excessive tilts toward specific countries, sectors, or company sizes, generating a balanced and diversified low volatility portfolio.

The MSCI Min Vol Index, which utilises a constrained optimisation process to create its low volatility equity portfolio, has outperformed capitalisation-weighted (cap-weighted) equity indices year-to-date.

Outperformance in a bear market

The index’s more diversified composition has helped it mitigate the impact of losses in the growth-heavy Magnificent Seven stocks which dominate cap-weighted indices. The index has also benefitted from a rotation into lower volatility names as investors have sought to diversify away from riskier high-volatility stocks.

Figure 2. Low vol outperforms in turbulent markets

Source: Bloomberg. As at 31 March 2025. Please Note: LHS illustrates average year-to-date S&P 500 returns ranked by 12-month ex-ante volatility quintile. RHS illustrates factors represented by MSCI World indices.

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It remains to be seen whether equity markets will continue their weakness. History suggests that if they do, low volatility equity strategies could continue their outperformance versus cap-weighted equity indices. The chart below illustrates the relative performance of the MSCI World Min Vol Index compared to the MSCI World Index, expressed as the ratio of their cumulative returns. The grey bars represent equity bear markets, as defined by a 20% or larger decline in the MSCI World Index over at least two months.   

Figure 3. Low vol strategy defends against drawdowns

Source: Man Group, MSCI. As at 28 February 2025.

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Over the last six bear markets, the MSCI Min Vol Index has consistently outperformed the MSCI World Index and insulated equity investors from the worst of the market’s drawdowns, highlighting its defensive characteristics. Perhaps most notable is the outperformance during the DotCom bubble of the early 2000s, which saw investors heavily concentrated in tech stocks suffer massive losses as valuations collapsed. With concentration in US tech names nearing historic extremes in global cap-weighted indices, this reinforces the need for diversification.

More recently, we discussed geographical diversification as a better way to approach equity investing over the long run. A low-volatility approach that focuses on stock-level diversification could be another compelling way to mitigate against the risks of an unbalanced market.

All data sourced from Bloomberg unless otherwise stated.

With contributions from Valerie Xiang, Man Numeric, and Max Buchanan, a Client Portfolio Management Analyst at Man AHL.

1. Represented by the UBS Magnificent Seven Index.

 

For further clarification on the terms which appear here, please visit our Glossary page.