What if the source of the next major disturbance to global markets is not as obvious as a recession?
It is a question that has been asked and answered by Jean Boivin, world researcher for the BlackRock Investment Institute.
Instead, the next crisis may stem from a combination of slow growth and somewhat higher inflation than we have seen in recent years, he told Business Insider during a recent interview.
This is a combination that can surprise investors and mark a major regime change, he said. For example, since the big recession, growth in the economy has not succeeded in increasing inflation in meaningful ways. It is a mismatch that puzzles even the smartest minds of economics and challenges the conventional theory that growth and inflation should move in the lock strip.
"There have been times when we have seen those moving in different directions," Boivin told Business Insider by phone. "That's why we emphasize it, because the past five years have not been representative of history, and we could see this type of combination."
He added: "Asset classes will not be the same as they have been in the last five years if we were to enter that world."
He particularly flagged the negative relationship between stocks and bonds; When the shares fall, stock prices rise because investors accumulate in Treasuries as a safety net. But this relationship has flourished in the period of low inflation that investors have become accustomed to, according to BlackRock's research.
The red area map below shows that inflation has been pushed against expectations for decades, and the yellow line shows that the negative correlation between stocks and bonds remains intact.
This negative correlation is in danger of being maintained by the combination of high inflation and low growth, Boivin said.
With regard to what might trigger dicey combo, he pointed to trade protection: if the world's largest economies continue to restrict free trade, they would both increase the price of goods and hamper economic production. And this twofold risk is urgent for Boivin than a recession.
Read more: BlackRock's global research director explains why the stock market's main driver just changed – and breaks down how investors are adapting to the big shift
To understand why he doesn't see a recession As the biggest risk To highlight, look no further than the central banks' sharp pivot to the deep monetary policy. The European Central Bank was the first to signal in June that it was closing its patience policy and shifting towards pumping more stimulus into the economy. The federal reserve then followed to determine the bond market that the interest rate should be lowered over the next year.
Market investors have greeted the Fed's pivot with a full-time rally. But the impact of what the Fed did could go beyond market reaction – it is likely to keep a recession at bay and stretch the longest ever economic expansion, according to Boivin.
Therefore, he recommends that investors remain positive on risk assets, even though trading has created uncertainty about the world economy.