In this article, we posit an equity tail risk scenario in which the real interest rate experiences a prolonged increase from its current level. We view this scenario as particularly relevant given the proposed policies of the incoming presidential administration, which is emphasizing significant demand side and supply side stimulus. Because a substantial fiscal stimulus can result in higher inflation when unemployment is low, the Fed may react by letting real yields escalate relative to growth. Therefore, while we allow for higher growth in our scenario, we do not assume a one-for-one translation from the interest rate to the growth rate.

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The Author

Jamil Baz

Co-head, Client Solutions and Analytics

Steve Sapra

Head of Client Solutions & Analytics, North America & Asia ex Japan

Nicolas Le Roux

Quantitative Research Analyst



This paper contains hypothetical analysis based on a set of assumptions that may or may not develop over time. Results shown may not be attained and should not be construed as the only possibilities that exist. Different weightings in the asset allocation illustration will produce different results. Actual results will vary and are subject to change with mar