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Opinion
Mohamed A. El-Erian

Investors Should Think Risk Factors, Not Asset Classes

The path forward for markets will depend on the success of the Fed, the strength of the labor market and the persistence of inflation.

A risk-factor analysis helps explain the evolution of valuations, correlations and volatility this year.

A risk-factor analysis helps explain the evolution of valuations, correlations and volatility this year.

Photographer: Ron Antonelli/Bloomberg

Rather than using the traditional asset-class analysis, I have found employing a risk-factor approach particularly helpful in understanding the impact of economics and policy on markets this year — not only in explaining the evolution of valuations, correlations and volatility, but also in pointing to what to look for in the near term.

One of the simple ways to think of risk-factor analysis is breaking down a financial asset or an asset class into the attributes of its market sensitivity — be it interest rates, credit, liquidity or momentum, for example. With that, certain bond classes, such as high yield, can be shown to be more sensitive to risk factors that impact stocks more than government bonds.