A pair of veteran Goldman Sachs researchers unpacked a central question at the 2020 Global Macro Conference in Hong Kong: why do economic cycles and market cycles increasingly move on separate tracks, and what does this mean for volatility and shocks from politics to climate? The discussion between Steve Strongin and Jan Hatzius delved into the evolving relationship between the real economy and financial markets, the surprising behavior of volatility across spaces, and how external impulses can ripple through both domains in distinct, sometimes disjoint ways. Their conversation offered a framework for interpreting how investors and policymakers might navigate a landscape where traditional linkages grow less predictable even as certain risks remain persistent.
Reframing the Relationship Between Economic and Market Cycles
The speakers began by revisiting the foundational idea that economic activity and asset prices typically respond to similar forces—growth, inflation, policy, and risk appetite—yet these responses increasingly diverge in timing and magnitude. From a theoretical standpoint, the real economy follows a more tangible path tied to production, employment, and consumer behavior, whereas financial markets reflect collective expectations, balance sheet conditions, and the psychology of risk-taking. Over time, a convergence of structural factors has encouraged this separation.
A key point centers on how policy regimes have reshaped cycles. With more credible central banks and a broader toolkit for stabilizing aggregate demand, the economy can absorb shocks with less immediate price instability. At the same time, financial markets have grown more sensitive to leverage, liquidity conditions, and cross-asset interconnections, amplifying or dampening responses in ways that are not always aligned with the pace of real activity. This decoupling means markets can price in scenarios or risks that the economy does not manifest promptly, or vice versa.
The discussion highlighted several drivers behind this decoupling. Global supply chains, which distribute production across borders, can mute local economic fluctuations while exposing investors to a different set of risks and opportunities. The proliferation of financial engineering, through derivatives, structured products, and sophisticated risk management, has altered how shocks propagate and how investors price uncertainty. Technological advances have also transformed information flows and speed of reaction, enabling rapid reassessments of growth prospects and policy expectations. Finally, the persistence of disinflationary forces in many major economies—driven by productivity gains, global labor markets, and technology—has changed the texture of cycles, shifting the balance of influence away from traditional inflationary shocks.
The analysts underscored that this evolving dynamic has tangible implications for decision-making. Portfolio construction, risk budgeting, and hedging strategies must adapt to a world where parts of the economy and parts of the financial system do not always move in lockstep. To illuminate these ideas, they identified several broad themes that recur across regions:
- The relation between real activity and asset prices is increasingly mediated by policy credibility and liquidity conditions.
- Asset markets may respond more to changes in risk appetite, funding conditions, and uncertainty about future policy than to current macro data alone.
- The transmission channels from shocks to markets differ from those that affect the real economy, creating additional layers of complexity for analysts and investors.
In closing this section, the speakers emphasized the need for a nuanced framework that recognizes both the similarities and the divergences between economic and market cycles. A robust approach requires paying careful attention to how policy regimes, financial architecture, and market psychology shape the path of each space—and how those paths interact when new shocks hit.
Long-Run Structural Shifts and Their Consequences
Within this broader discussion, a deeper look at long-run structural shifts helps explain why cycles can diverge. One notable trend is the shift from inflation-focused regimes to more credibility-centered policy environments. As central banks gained experience with unconventional tools and gained the trust of markets, policymakers could lean more on balance-sheet support and rate normalization strategies without triggering destabilizing inflation. This shift tends to smooth economic cycles while leaving markets exposed to the swings of confidence and liquidity.
Another structural factor is the changing role of fiscal policy in stabilizing demand. When governments deploy or withdraw stimulus in response to political cycles, the real economy may experience slower but steadier growth, while markets react more erratically to anticipated fiscal trajectories. The combination of disciplined macro frameworks and adaptive fiscal responses can reduce the amplitude of economic swings, yet raise the sensitivity of markets to surprises in policy direction.
Globalization also plays a dual role. On one hand, interconnected economies can share risk and dampen country-specific shocks; on the other hand, cross-border channels can transmit disturbances rapidly and broadly, sometimes before policymakers have a chance to respond. This networked environment increases the likelihood that a shock in one region reverberates across multiple markets, even if the domestic economy remains comparatively resilient.
Investors and researchers alike should take away a practical implication: the traditional signals used to gauge the stage of the cycle may become less reliable as a sole predictor of market behavior. A more holistic framework, which integrates macro fundamentals, policy dynamics, financial conditions, and sentiment indicators, is better suited to capture how the two spaces interact over time. This approach also informs risk-management practices, ensuring that portfolios remain resilient under a wider set of possible paths for both the real economy and asset prices.
Volatility Dynamics: Why Economic Volatility has Declined While Market Volatility Has Largely Held Steady
A central pillar of the discussion focused on volatility patterns. The speakers noted a notable long-run trend: economic volatility—the fluctuations in actual economic activity, such as growth rates or output gaps—has softened in the wake of prior shocks, while volatility in financial markets has not shown a commensurate decline. This divergence challenges the conventional wisdom that all major systems share a common rhythm of ups and downs.
To understand this phenomenon, the dialogue distinguished between different forms of uncertainty and their transmission channels. Economic data often reflect real-time activity—production, hiring, consumption—that is shaped by underlying demand, supply constraints, and productivity trends. Market volatility, in contrast, frequently embodies expectations about the future: policy moves, earnings trajectories, and the path of interest rates. When investors reprice risk or adjust expectations in anticipation of policy shifts, markets can exhibit amplified moves, even if the current or near-term economy remains relatively steady.
The analysts pointed to several factors that help explain why economic volatility has fallen while market volatility persists. First, policy credibility and the effectiveness of stabilization tools can dampen the amplitude of real economic swings. Central banks’ ability to reassure markets with credible forward guidance reduces the probability of dramatic swings in output and employment. Second, the evolution of financial markets—characterized by deeper liquidity pools, more sophisticated risk management, and widespread hedging—can absorb shocks more smoothly, cushioning the real economy from abrupt disruptions.
Yet market volatility remains shaped by unique drivers. Leverage dynamics, funding conditions, and the interplay between equity and fixed-income markets can magnify price movements even when the underlying economic fundamentals are stable. Additionally, the increasing speed and sensitivity of information dissemination can cause markets to respond to news or speculative developments with rapid re-pricing, often before fundamentals catch up. The result is a financial system that can experience pronounced short-term fluctuations in asset prices, even in periods of relative macro calm.
The discussion also emphasized the importance of measurement and interpretation. Volatility is not a monolithic concept; different data series, horizons, and methodologies yield varied portraits of stability or turbulence. Investors are advised to consider a range of indicators—macro surprises, risk premia, liquidity metrics, and cross-asset volatility—instead of relying on a single metric. A nuanced reading helps distinguish between temporary jitters and lasting shifts in the risk landscape.
From a practical perspective, the implications for risk management are clear. With economic volatility suppressed but market volatility more persistent, portfolios should be built with a focus on liquidity resilience, diversification beyond traditional asset classes, and robust hedging strategies that address tail risks. Stress-testing frameworks should incorporate scenarios that reflect divergent paths for the real economy and the financial markets, ensuring that strategies remain robust under both macro-stability and potential market disruption.
The Role of Policy and Expectations in Shaping Volatility
The dialogue underscored that expectations about policy trajectories—monetary and fiscal—are major drivers of market volatility. Even when current data point toward a stable or gradually improving economy, shifts in expected policy paths can trigger outsized moves in asset prices. In environments where policy signals are nuanced or ambiguous, investors may react not to the present state of growth or inflation but to anticipated policy outcomes. This disconnect can manifest as volatility that is more pronounced in financial markets than in the real economy.
Furthermore, the team highlighted how evolving regulatory and institutional frameworks influence volatility patterns. Greater transparency and standardized risk management practices can reduce some forms of uncertainty, but they can also concentrate risk in new channels or encourage rapid re-pricing in response to policy hints. As a result, volatility becomes a function of both macro fundamentals and the evolving market structure, rather than a straightforward reflection of economic performance alone.
In sum, the dynamics of volatility reveal a more intricate landscape than a simple correspondence between macro data and market moves. For investors and policymakers, this means maintaining vigilance on the quality of information, the credibility of policy commitments, and the potential for rapid shifts in expectations that can drive persistent market turbulence even in periods of macro quiet.
Shock Transmission: Political Surprises and Climate Change as Catalysts for Change
A distinctive portion of the discussion centered on shocks that do not fit neatly into conventional macro narratives but still have profound implications for both the real economy and financial markets. Two broad categories—political surprises and climate-related developments—were examined for their channels of transmission and the degree to which they alter risk premia and asset valuations.
Political surprises, such as unexpected election outcomes, policy pivots, or governance changes, can recalibrate risk pricing both domestically and globally. The speakers explained that political events influence market psychology, alter projections about fiscal policy, and reshape regulatory environments. When such events occur, markets tend to reassess growth prospects, debt sustainability, and the likelihood of stimulus or austerity measures. The resulting volatility can be swift and pervasive, as investors reallocate portfolios to reflect revised risk-reward calculations. The discussion also noted that political shocks often interact with existing structural vulnerabilities, potentially amplifying feedback loops between the real economy and asset prices.
Climate change, by contrast, introduces a longer-term risk horizon that interacts with multiple facets of the economy and financial markets. The conversation explored how climate-related considerations affect investment decisions, asset pricing, and the resilience of both corporate and sovereign balance sheets. Climate risk manifests in several channels: physical risks from extreme weather events that disrupt supply chains and infrastructure; transition risks as economies move away from fossil fuels, which can reshape sectoral profitability and capital allocation; and liability risks stemming from regulatory changes or litigation. Each channel can influence the cost of capital, investment timing, and the pricing of risk across markets.
The speakers stressed that climate-related shocks may unfold gradually, yet their cumulative effects can be material and persistent. This realization prompts investors to integrate climate risk into scenario analysis, stress testing, and long-horizon forecasting. Policy responses to climate risk—such as carbon pricing, investment incentives for clean technologies, and infrastructure spending—also carry macroeconomic implications. The intersection of climate risk with political dynamics creates a complex environment in which markets must price both short-term volatility and longer-term structural changes.
Transmission Channels Across Real and Financial Spaces
The dialogue identified several core channels through which shocks propagate, offering a framework for analysts to examine potential outcomes:
- Expectations and sentiment: Shocks alter how households, firms, and financial market participants anticipate future growth, inflation, and policy moves, prompting adjustments in spending, hiring, and investment.
- Financing conditions: Changes in funding costs, liquidity conditions, and credit availability directly influence the ability of corporations and governments to pursue programs that affect growth trajectories.
- Production and supply chains: Disruptions—whether political, climatic, or regulatory—impact the flow of goods and services, translating into real-economy effects with lagged and composite market reactions.
- Risk premia and asset pricing: Shocks shape the compensation investors demand for bearing risk, which in turn drives valuations, dispersion across asset classes, and the structure of carry trades.
- Policy credibility and reaction functions: The perceived reliability of policy frameworks determines how quickly markets incorporate information about future stabilization measures, potentially smoothing or destabilizing reactions to shocks.
The discussion emphasized that these channels do not operate in isolation. A political surprise can rewire expectations about fiscal or regulatory policy, which then alters financing conditions and risk premia across several asset classes. Climate risk can affect sectoral profitability and the cost of capital while simultaneously influencing sovereign risk assessments if fiscal capacity and debt sustainability are called into question. Understanding these interconnections is essential for constructing resilient investment strategies and informed policy responses.
Practical Implications for Risk Management and Strategy
From a practical perspective, the panelists argued for an integrated approach to risk management that accounts for both macro and market dynamics. Investors should employ diversified strategies that span geographies, sectors, and asset classes, while also incorporating climate and policy risk into risk budgets. Scenarios that embed political shocks and climate-related developments help reveal potential vulnerabilities in portfolios and highlight sources of concentration risk. This forward-looking mindset supports more robust stress testing and provides a clearer view of how shocks could affect funding, liquidity, and valuation in different market environments.
For policymakers, the emphasis was on preserving credible policy anchors while recognizing the role of climate risk and political uncertainty in shaping macro stability. This entails clear communication, transparent policy frameworks, and proactive planning for tail risks. The convergence of macro prudence with climate-aware investment incentives can help align long-term fiscal sustainability with market confidence, reducing the likelihood of abrupt, destabilizing reactions to unforeseen events.
Investors are encouraged to develop playbooks that reflect the evolving nature of shocks. Such playbooks might include robust hedging strategies, dynamic asset allocation that can adapt to shifting risk appetites, and a disciplined approach to leverage and liquidity management. The overarching goal is to build portfolios that can withstand a spectrum of shocks without compromising long-term objectives.
Practical Guidance for Markets and Policy in an Uncertain Landscape
The discussion concluded with a focus on actionable insights for market participants and policymakers navigating an era of nuanced cycles and persistent volatility. The speakers underscored that success hinges on balancing resilience, flexibility, and disciplined risk management, all while aligning expectations with credible policy signals and evolving structural realities.
- Investors should emphasize diversification and liquidity, while integrating non-traditional risk factors—such as climate risk and political uncertainty—into core analytic frameworks.
- Risk budgets should be calibrated to reflect the decoupled nature of macro and market dynamics, ensuring that downside protection remains intact even when real activity appears stable.
- Portfolio construction should accommodate a range of potential shock scenarios, including political shifts and climate-related transitions, to preserve upside potential across different futures.
- Policymakers should prioritize transparent communication, credible policy paths, and contingency planning that acknowledges both the short-term volatility created by shocks and the longer-term challenges posed by climate risk and structural changes.
In sum, the dialogue offered a coherent lens for interpreting how economic cycles and market cycles interact in a world where volatility can be asymmetric and shocks can appear in unexpected forms. By recognizing the distinct yet interwoven pathways through which real activity and financial markets respond to shocks, market participants and policymakers can better prepare for a landscape characterized by evolving dynamics and persistent uncertainty.
Conclusion
The exchange between Steve Strongin and Jan Hatzius at the 2020 Global Macro Conference in Hong Kong highlighted a fundamental shift in how economic cycles and market cycles relate to one another. While the real economy has grown increasingly insulated from some of the extremes of prior volatility, financial markets continue to exhibit pronounced fluctuations driven by risk sentiment, liquidity conditions, and policy expectations. The discussion emphasized that shocks—from political pivots to climate risks—propagate through both spaces via multiple channels, yet the responses of economies and markets can diverge in timing and intensity.
A practical takeaway is the importance of adopting a holistic framework that captures the complex interactions between growth, policy, and risk pricing. Investors should structure portfolios that can withstand a spectrum of future states, incorporating diversification, liquidity management, and climate-aware risk assessments. Policymakers, in turn, are encouraged to maintain credible policy pathways, improve communications, and incorporate climate risk considerations into macro stability plans to reduce the probability and impact of destabilizing shocks.
Together, these insights paint a picture of a global macro landscape that is more interconnected than ever, yet marked by distinct dynamics in economic activity and financial market behavior. By embracing a nuanced understanding of where cycles converge and where they diverge—and by preparing for shocks across political and environmental dimensions—markets and economies can navigate uncertainty with greater resilience and clarity.
