Commentary

A Riskier World May Call for More Equities, Not Less.

by Adam Steffanus, CFA on July 23, 2026

The standard hedge is working less reliably just as shocks grow more frequent.

Armed Conflict Chart
Macroeconomic shocks appear to be arriving more often, highlighted by 65 armed conflicts involving a state in 2025 – the highest level since World War II. Layer on toxic trade politics, rising government debt, and more frequent extreme-weather events, and the macro backdrop is one of recurring disruption. The traditional response has been to reduce equity exposure in favor of bonds, but that conclusion assumes the historical relationship between stocks and bonds still holds.

For much of the past half century, U.S. government bonds effectively hedged equity weakness because most shocks were demand-driven, resulting in slower growth and falling rates. As yields declined, bond prices rose, offsetting equity losses during periods of stress. That negative correlation became a foundational assumption behind the traditional balanced portfolio.

Recent shocks have increasingly come from the supply side. Conflict, tariffs, and fiscal expansion can slow growth while pushing inflation and rates higher, weakening the case for bonds as a reliable offset. The second chart illustrates the shift: in earlier decades, Treasuries (the dark blue line) rallied sharply as equities fell, at times compounding more than 50% over the drawdown. In several of the most recent episodes, that contribution has been far smaller, and occasionally negative.
Treasuries During Drawdowns Chart 4This has led some long-term institutional investors to revisit their frameworks. In a Wall Street Journal article, Raphael Arndt, chief executive of Australia's Future Fund, argued that a structurally more volatile world warrants a higher equity exposure. If inflationary shocks erode the defensive value of bonds, investors may instead need to rely more on the long-term earnings growth of equities, even if it comes with a bumpier path. 

In an environment where shocks are more frequent and traditional portfolio relationships less dependable, we believe owning high-quality businesses with durable competitive advantages and the capacity to compound value through changing conditions remains a solid foundation for long-term investors.
 
 

Sources: Shawn Davies, Therése Pettersson, Magnus Öberg, Organized violence 1989–2025, and violent political protests, Journal of Peace Research, 2026. https://doi.org/10.1093/jopres/xjag046. Gleditsch, Nils Petter, Peter Wallensteen, Mikael Eriksson, Margareta Sollenberg, and Håvard Strand (2002) Armed Conflict 1946-2001: A New Dataset. Journal of Peace Research 39(5). UCDP is part of and funded by DEMSCORE, national research infrastructure grant 2021-00162 from the Swedish Research Council. Mackintosh, James. "How to Invest When the Global Crises Never Stop." The Wall Street Journal, 11 July 2026, www.wsj.com/finance/investing/how-to-invest-when-the-global-crises-never-stop-3c8cc542.

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