Schrödinger’s economy – when should we open the box?

Schrödinger’s economy – when should we open the box?

07-09-2022 | Monthly outlook
Knowing the true state of the US economy will be key to assessing risks for the coming months, says multi-asset investor Colin Graham.
  • Colin  Graham
    Head of Multi Asset Strategies and Co-Head of Sustainable Multi Asset Solutions

Speed read

  • Views vacillate between ‘US is in recession’ to ‘an opportunity to invest’
  • Data is contradictory as supply shocks are negative, job news positive
  • Uncertainty over corporate earnings means downside risks are growing

He likens the debate over whether the world’s largest economy is in recession to ‘Schrödinger's Cat’, a thought experiment conducted in 1935 by the Austrian physicist Erwin Schrödinger, a pioneer of quantum mechanics.

Schrödinger hypothesized that a cat in a closed box could be in two simultaneous states (dead and alive) based on whether a radioactive atom had decayed or not. If it had, emitting radiation, a flask of poison was broken, killing the cat. Only once the box is opened can the observer be sure which state the cat is in.

“We can read this across to the US economy because currently, observers do not know the true state of it,” says Graham, Head of Multi-Asset Strategies at Robeco. “Their views range from ‘we’re already in recession’ (two successive quarters of negative GDP growth) to ‘we’re expecting only a mild slowdown’ to ‘an opportunity to invest long term’. The consensus vacillates wildly between these outcomes on a weekly, daily or hourly basis.”

“Only with more time, more data and a hindsight lens will these two states of the economy be reconciled, and then market participants can open the metaphorical box. The additional complication is that we don’t have a good read on the baseline, as recent history has distorted the starting point of the initial Covid lockdowns to the subsequent fiscally simulated sugar highs.”

“Looking forwards, there are structural changes to the economy – hybrid working and blockchain – so even the historic baseline drawn through this volatility is in question.”

Stay informed on our latest insights with monthly mail updates
Stay informed on our latest insights with monthly mail updates

If the US sneezes, the world catches cold

The health of the US economy is vital for planning multi-asset investments since it influences the values of trillions of dollars of equities, government bonds, corporate bonds (credits), and the value of the dollar itself. A recession prompted by interest rate rises to combat inflation would cause both equities and government bonds to fall, making it difficult to know where to allocate capital.

“The US economy has been bombarded with many challenges over the last 12 months: raising rates, commodity and supply chain shocks, the cost of living squeeze and excess demand,” Graham says. “Yet, the lagging data such as employment, inflation and the cost of housing is still indicating a ‘strong economy’.”

“In our view, this tells us what we already know: that the US economy was alive before the bombardment. Monetary policy has moved away from ‘emergency’ levels and financial conditions have tightened, due to rates going up and the strength of the US dollar.”

“Hence, central banks are talking down the second-round effects of inflation and are moving to be more data-dependent. Our interpretation is that the central banks are moving to more real-time assessments of economic strength. In other words, watching inflation and employment levels is like driving a car by looking in the rear-view mirror.”

Equities and bonds price in different outcomes

So, what does this mean for investors as the fourth and final quarter of 2022 looms? “Investors are forward looking and try to anticipate the levels of returns over various time horizons, which is one of the reasons why markets are inefficient,” Graham says.

“In June, using our scenario analysis, we saw that the recent market low for equities and spread highs for credit began to price in different outcomes, with high yield expecting the outlook to be worse.”

“Market catalysts for the turnaround were interest rate expectations falling, bond yields falling, headline inflation moderating and earnings delivering, coupled with very bearish positioning. A very potent mix for a rally in risk assets.”

Decomposing the ‘Cat-alysts’

“If we decompose these catalysts – we might say ‘Schrödinger's Cat-alysts’ – to see which of them are sustainable, positioning is difficult to assess, as the data only gives you part of the story. But we can conclude that the broad sentiment indicators have moved from being extremely bearish to middle of the range, so there are no positive signals now.”

“Secondly, inflation is still high, and the Fed will continue to raise rates until aggregate demand starts to weaken, and employment softens enough to stabilize inflation in the medium term. Hence, the concern about over-tightening monetary policy, because interest rates are a blunt tool and supply-side issues are independent of central bank policy. And the Fed has never slowed the economy from these levels of employment and inflation without it resulting in a recession.”

“Lastly, the Q2 earnings season was good in aggregate, but scratch below the surface and the picture is less rosy, with the positive drivers coming from the energy sector and a narrow number of stocks.”

Downside risks are growing

This all leads to a gloomier outlook. “Looking forwards, consumer confidence is deteriorating while purchases are becoming less affordable, and the US first-time buyer affordability index is at lows seen in 2006 and 1989, which does not bode well as winter looms,” Graham says.

“Corporate balance sheets are in good shape and some sectors have passed on their rising input costs, but earnings delivery will become more challenging and confidence around the current level of earnings projected forward in valuations is questionable.”

“Hence, derating might be steeper than is currently priced in. As we progress to end of the year and get closer to opening Schrödinger’s box and seeing what state the US economy is really in, we believe the downside risks are growing.”

Important information

The contents of this document have not been reviewed by the Securities and Futures Commission ("SFC") in Hong Kong. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. This document has been distributed by Robeco Hong Kong Limited (‘Robeco’). Robeco is regulated by the SFC in Hong Kong.
This document has been prepared on a confidential basis solely for the recipient and is for information purposes only. Any reproduction or distribution of this documentation, in whole or in part, or the disclosure of its contents, without the prior written consent of Robeco, is prohibited. By accepting this documentation, the recipient agrees to the foregoing
This document is intended to provide the reader with information on Robeco’s specific capabilities, but does not constitute a recommendation to buy or sell certain securities or investment products. Investment decisions should only be based on the relevant prospectus and on thorough financial, fiscal and legal advice. Please refer to the relevant offering documents for details including the risk factors before making any investment decisions.
The contents of this document are based upon sources of information believed to be reliable. This document is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.
Investment Involves risks. Historical returns are provided for illustrative purposes only and do not necessarily reflect Robeco’s expectations for the future. The value of your investments may fluctuate. Past performance is no indication of current or future performance.



1. General
Please read this information carefully.

This website is prepared and issued by Robeco Hong Kong Limited ("Robeco"), which is a corporation licensed by the Securities and Futures Commission in Hong Kong to engage in Type 1 (dealing in securities); Type 4 (advising in securities) and Type 9 (asset management) regulated activities. The Company does not hold client assets and is subject to the licensing condition that it shall seek the SFC’s prior approval before extending services at retail level. This website has not been reviewed by the Securities and Futures Commission or any regulatory authority in Hong Kong.

2. Important risk disclosures
2. Important risk disclosures Robeco Capital Growth Funds (“the Funds”) are distinguished by their respective specific investment policies or any other specific features. Please read carefully for the risks of the Funds:

  • Some Funds are subject to investment, market, equities, liquidity, counterparty, securities lending and foreign currency risk and risk associated with investments in small and/or mid-capped companies.
  • Some Funds are subject to the risks of investing in emerging markets which include political, economic, legal, regulatory, market, settlement, execution, counterparty and currency risks.
  • Some Funds may invest in China A shares directly through the Qualified Foreign Institutional Investor (“QFII”) scheme and / or RMB Qualified Foreign Institutional Investor (“RQFII”) scheme and / or Stock Connect programmes which may entail additional clearing and settlement, regulatory, operational, counterparty and liquidity risk.
  • For distributing share classes, some Funds may pay out dividend distributions out of capital. Where distributions are paid out of capital, this amounts to a return or withdrawal of part of your original investment or capital gains attributable to that and may result in an immediate decrease in the net asset value of shares.
  • Some Funds’ investments maybe concentrated in one region / one country / one sector / around one theme and therefore the value of the Fund may be more volatile and may be subject to concentration risk.
  • The risk exists that the quantitative techniques used by some Funds may not work and the Funds’ value may be adversely affected.
  • In addition to investment, market, liquidity, counterparty, securities lending, (reverse) repurchase agreements and foreign currency risk, some Funds are subject to risk associated with fixed income investments like credit risk, interest rate risk, convertible bonds risk, ABS risk and the risk of investments in non-investment grade or unrated securities and the risk of investments made in non-investment grade sovereign securities.
  • Some Funds can use derivatives extensively. Robeco Global Consumer Trends Equities can use derivatives for hedging and efficient portfolio management. Derivatives exposure may involve higher counterparty, liquidity and valuation risks. In adverse situations, the Funds may suffer significant losses (even a total loss of the Funds’ assets) from its derivative usage.
  • Robeco European High Yield Bonds is subject to Eurozone risk.
  • Investors may suffer substantial losses of their investments in the Funds. Investor should not invest in the Funds solely based on the information provided in this document and should read the offering documents (including potential risks involved) for details.

3. Local legal and sales restrictions
The Website is to be accessed by “professional investors” only (as defined in the Securities and Futures Ordinance (Cap.571) and/or the Securities and Futures (Professional Investors) Rules (Cap.571D) under the laws of Hong Kong). The Website is not directed at any person in any jurisdiction where (by reason of that person’s nationality, residence or otherwise) the publication or availability of the Website is prohibited. Persons in respect of whom such prohibitions apply or persons other than those specified above must not access this Website. Persons accessing the Website need to be aware that they are responsible themselves for the compliance with all local rules and regulations. By accessing this Website and any of its pages, you acknowledge your agreement with understanding of the following terms of use and legal information. If you do not agree to the terms and conditions below, do not access this Website or any pages thereof.

The information contained in the Website is being provided for information purposes.

Neither information nor any opinion expressed on the Website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. The information contained in the Website does not constitute investment advice or a recommendation and was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. An investment in a Robeco product should only be made after reading the related legal documents such as management regulations, prospectuses, most recent annual and semi-annual reports, which can be all be obtained free of charge at www.robeco.com/hk/en and at the Robeco Hong Kong office.

4. Use of the Website
The information is based on certain assumptions, information and conditions applicable at a certain time and may be subject to change at any time without notice. Robeco aims to provide accurate, complete and up-to-date information, obtained from sources of information believed to be reliable. Persons accessing the Website are responsible for their choice and use of the information.

5. Investment performance
No assurance can be given that the investment objective of any investment products will be achieved. No representation or promise as to the performance of any investment products or the return on an investment is made. The value of your investments may fluctuate. The value of the assets of Robeco investment products may also fluctuate as a result of the investment policy and/or the developments on the financial markets. Results obtained in the past are no guarantee for the future. Past performance, projection, or forecast included in this Website should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Fund performance figures are based on the month-end trading prices and are calculated on a total return basis with dividends reinvested. Return figures versus the benchmark show the investment management result before management and/or performance fees; the fund returns are with dividends reinvested and based on net asset values with prices and exchange rates of the valuation moment of the benchmark.
Investments involve risks. Past performance is not a guide to future performance. Potential investors should read the terms and conditions contained in the relevant offering documents and in particular the investment policies and the risk factors before any investment decision is made. Investors should ensure they fully understand the risks associated with the fund and should also consider their own investment objective and risk tolerance level. Investors are reminded that the value and income (if any) from shares of the fund may be volatile and could change substantially within a short period of time, and investors may not get back the amount they have invested in the fund. If in doubt, please seek independent financial and professional advice.

6. Third party websites
This website includes material from third parties or links to websites maintained by third parties some of which is supplied by companies that are not affiliated to Robeco. Following links to any other off-site pages or websites of third parties shall be at the own risk of the person following such link. Robeco has not reviewed any of the websites linked to or referred to by the Website and does not endorse or accept any responsibility for their content nor the products, services or other items offered through them. Robeco shall have no liability for any losses or damages arising from the use of or reliance on the information contained on websites of third parties, including, without limitation, any loss of profit or any other direct or indirect damage. Third party off-site pages or websites are provided for informational purposes only.

7. Limitation of liability
Robeco as well as (possible) other suppliers of information to the Website accept no responsibility for the contents of the Website or the information or recommendations contained herein, which moreover may be changed without notice.
Robeco assumes no responsibility for ensuring, and makes no warranty, that the functioning of the Website will be uninterrupted or error-free. Robeco assumes no responsibility for the consequences of e-mail messages regarding a Robeco (transaction) service, which either cannot be received or sent, are damaged, received or sent incorrectly, or not received or sent on time.
Neither will Robeco be liable for any loss or damage that may result from access to and use of the Website.

8. Intellectual property
All copyrights, patents, intellectual and other property, and licenses regarding the information on the Website are held and obtained by Robeco. These rights will not be passed to persons accessing this information.

9. Privacy
Robeco guarantees that the data of persons accessing the Website will be treated confidentially in accordance with prevailing data protection regulations. Such data will not be made available to third parties without the approval of the persons accessing the Website, unless Robeco is legally obliged to do so. Please find more details in our Privacy and Cookie Policy.

10. Applicable law
The Website shall be governed by and construed in accordance with the laws of Hong Kong. All disputes arising out of or in connection with the Website shall be submitted to the exclusive jurisdiction of the courts of Hong Kong. 

Please click the “I agree” button if you have read and understood this page and agree to the Disclaimers above and the collection and use of your personal data by Robeco, for the purposes for which such data is collected and used as set out in the Privacy and Cookie Policy, including for the purpose of direct marketing of Robeco products or services. Otherwise, please click “I Disagree” to leave the website.

I Disagree