Diversify for a new regime with multi-asset strategies and real assets
As markets absorb overlapping macro shocks and stock-bond relationships shift, traditional diversification is becoming less reliable. Multi-asset strategies and inflation-sensitive exposures can help improve portfolio resilience across changing growth and inflation environments.
As growth, inflation, policy, and geopolitics become less synchronized, unpredictability—not just volatility—is shaping markets, creating new risks and new sources of potential return.
Significant macro shifts are proving structural—not transitory. From globalization to deglobalization and cooperation to self-sufficiency, these shifts are reshaping capital flows, the cost of capital, and inflation dynamics. At the same time, the AI-driven CapEx cycle is introducing a new layer of complexity—creating near-term inflation pressures through increased demand for resources, while the timing and magnitude of longer-term productivity gains remain uncertain. And although global growth remains positive, risk assets have become more sensitive to shifting macro conditions.
The relationship between stocks and bonds has also shifted. Stock-bond correlations are now positive and elevated. The rolling 3-year correlation of monthly returns between global stocks and bonds is in the 89th percentile over the past 35 years.1 Over the past three years, in nine out of the last 11 months, when equities fell, bonds did too2—reinforcing our understanding that this new macro regime can challenge both sides of a traditional portfolio at once.
Portfolios built for a single set of macro conditions are increasingly exposed to these abrupt shifts, leaving traditional diversification less reliable. Today, diversification must do more than manage risk—it must help balance portfolios to remain resilient across a wider range of outcomes.
Importantly, this broader range of outcomes also creates a wider opportunity set—one that can be accessed through more dynamic, multi-asset approaches that include:
- Multi-asset allocations that diversify across geographies, sectors, and economic environments
- Inflation-sensitive assets such as multi-sector real assets or commodities to help improve portfolio balance as price pressures evolve
- Gold, which has historically exhibited low correlation to equities and bonds,3 and may help diversify sources of risk, particularly during periods of inflation and policy uncertainty
Elevated uncertainty is eroding market stability
These diversification tools are becoming increasingly important in an environment where global economic uncertainty is running roughly 300% above historical norms (Figure 1). The steadily rising 1-year average underscores just how distinct and unsettled today’s regime has become. And with rapidly shifting politics and policy, growth and inflation expectations are being repriced more frequently—driving volatility and disrupting market trends.
Increasingly, the state is playing a more active role in shaping economic and market outcomes. Industrial policy, trade restrictions, and supply chain realignment are accelerating as countries prioritize self-sufficiency and strategic advantage. At the same time, traditional multilateral anchors like NATO, WTO, OPEC+ are weakening, contributing to a more fragmented global landscape and raising the potential for more frequent geopolitical conflict.
Market indicators reinforce this fragility. Bond volatility is well above average4 and the VIX Index has averaged above the noteworthy 20-level in 2026—after averaging below that level for three years.5 At the same time, S&P 500 risk reversals show a higher-than-average cost of downside protection versus for upside exposure in 2026.6
This instability is also evident in weaker market trends. Rolling 14-day autocorrelation of returns has remained below average (i.e., lower than normal correlation) in both 2025 and 20267—the first stretch since 2020—underscoring how idiosyncratic, policy-driven events (i.e., a policy statement on a cease fire or a call for more engagement) are disrupting typical market patterns.
Tough inflation-growth mix heightens fragility
Amid these shifts, inflation has become a more durable risk factor. Structural forces are keeping prices elevated, with headline CPI and PCE (both over 3%) remaining above target and drifting further from 2%.8 While energy prices have been a recent partial catalyst, slower-moving measures—such as Atlanta Fed Sticky CPI (3.0%) and Sticky CPI ex-shelter (2.8%)—have also moved higher, suggesting persistent underlying inflation.9
The most recent May CPI report showed rising energy prices have had a cascading effect on other goods and services that rely on petroleum inputs—such as groceries, hotels, and transportation. Reflecting those pressures, Supercore CPI (which excludes housing and energy) continued its upward trend and is now well over 3%.10
Beyond tariffs and supply chain reconfiguration, another non-transitory force is emerging: the AI-driven CapEx cycle. The build-out of infrastructure and memory is intensifying competition for critical inputs, creating a near-term inflation impulse, even as the longer-term productivity gains remain further out.
These pressures are beginning to show in upstream data. Recent PPI reports highlight sharp increases in categories like manufacturing components and processed materials with finished goods prices rising at the fastest pace since 2022. This aligns with Institute for Supply Management surveys, where prices-paid readings have also reached their highest levels since 2022—underscoring persistent cost pressures across production.11
Geopolitical stress, from Venezuela to the Iran war, also contributes to shifting near-term inflation expectations—amplifying existing structural risks and increasing inflation volatility. The standard deviation of the rate of change in near-term breakeven rates has risen to the upper 80th percentile of its historic average.12
That volatility in inflation expectations feeds directly into markets, as investors continuously reprice growth assumptions and risk premiums—driving greater asset price volatility. Growth expectations have been revised lower—not just in the US, but globally—as higher prices and supply chain friction weighs on demand (Figure 2).
And while growth is still expected to remain positive, the combination of softer growth and firmer inflation underscores a more challenging macro mix.
Monetary and fiscal policy dynamics add headwinds
Policymakers are navigating a more difficult growth–inflation tradeoff, leading to a repricing of rate expectations.
In April, global rate hikes outpaced cuts for the first time since August 2023—signaling a potential shift away from synchronized easing.13 Market forecasts for major economies have repriced accordingly, further reflecting the new regime defined by persistent inflation and greater geopolitical fragmentation.
Rate pricing across major economies has shifted from a neutral-to-easing bias toward a more restrictive stance (Figure 3). Higher policy rates raise the cost of capital, potentially weighing on consumption and aggregate demand.
Fiscal policy could offset some of this drag through increased spending or targeted support, but that would require higher debt issuance at a time when deficits are already widening amid deglobalization and the push for self-sufficiency.
The result is upward pressure on term premiums and still-steepened yield curves, as investors demand compensation for rising inflation and fiscal risks. US term premiums have remained positive for over 400 trading days—since the 2024 election—while major economies yield curves are broadly steeper than at the start of 2025.14 This dynamic is most evident in long-dated bonds, with 30-year UK gilt yields approaching 6%, their highest level since 1998.15
Higher-for-longer policy rates, steepened curves, and rising term premiums reflect persistent growth–inflation uncertainty with the potential for growth downside risks and inflation upside risks. This dynamic, the opposite of a Goldilocks environment (rising growth and falling inflation) where stocks and nominal bonds thrive, reinforces pressure on both equities and bonds, further limiting the effectiveness of traditional 60/40 portfolio construction.
Diversification must adapt to a wider range of outcomes
With the focus shifting to how portfolios are constructed to perform across different growth and inflation environments, investors need to take a more deliberate approach to diversification.
The current backdrop is complex—and unlikely to become less so, particularly with the US midterm elections approaching. The potential for a shift in control—driven in part by rising cost-of-living pressures16 sets the stage for increased partisan tension, adding another layer of uncertainty to an already fragile growth–inflation dynamic.
The inflationary impact of the World Cup this spring should also be considered. The event is expected to lift demand for airfare, hotels, restaurants, and transportation—categories already facing upward price pressure. Bank of America estimates that 6.5 million people will attend the 104 matches across the US, Canada, and Mexico,17 with approximately $6.4 billion in tourist spending projected in the US alone.18
Together, these crosscurrents reinforce the need for more balanced and resilient portfolios—especially as many remain heavily allocated to US equities and nominal bonds.19
To help build durability in this environment, investors may consider:
1. A global multi-asset strategy allocated across economic environments, assets, and geographies in a single allocation like the State Street® Bridgewater® All Weather® ETF (ALLW) to help:
- Balance risk: Because rising growth/falling inflation assets are the main allocations in many portfolios, incorporate assets that perform across different growth and inflation environments
- Broaden the asset allocation mix: Go beyond stocks and nominal bonds to include alternatives and inflation-sensitive assets
- Reduce US equity concentration: At a time when US assets face unique pressures from the shift away from global cooperation, global diversification matters more than ever
2. Commodities or gold to complement traditional assets to help hedge inflation volatility and broaden portfolio balance.
- Real assets: Inflation-linked bonds, natural resource equities, real estate, and commodity markets have historically had a stronger, and broadly positive, correlation to changes in inflation trends than equities and nominal bonds.20 Blending those together or focusing on the most sensitive to inflation (commodities with a 0.35 correlation) may help improve diversification resilience.21
- Gold: Beyond its role as an inflation hedge and its growth dynamics, gold may have further strategic value. It has a low correlation to global equities and core bonds.22 Additionally, structural demand from central banks—driven by de-dollarization and rising deficits—provides a tailwind as sovereign debt concerns grow globally.
In a market defined by unpredictability, the challenge is not predicting the regime—but building portfolios designed to perform across a wider range of outcomes.
Implementation ideas
To reposition your portfolio to help target resilience and diversification, consider:
Multi-asset allocation strategies
Global inflation-sensitive markets
SPDR® Gold Suite
