What's next for the global economy?

Vaughan Nelson CIO and CEO Chris Wallis discusses the recent “aggressive” rally in equities, rising inflation and bond yields around the world and how Vaughan Nelson is managing portfolios through this volatile period. 

Podcast recorded on 19 May 2026

This is a lightly edited transcript from the podcast

Dan: Welcome to the Vaughan Nelson Podcast. With me today is CEO and CIO Chris Wallis. Welcome, Chris.

Chris: It's good to be here,

Dan. All right, Chris, good to have you back. Again, there's just been a little bit of a gap since we last spoke. And really, what we've seen since April is an aggressive rally. The market is now up about 13.5% since the beginning of April. Looking out at this run, it's really marked by unprofitable tech and some high short-interest companies. And now, what we're seeing here in the last few days is some bond yields starting to blow out across the globe. The market appears to be in the early stages of correction. So, the question to open up with you today is, what do you see as the current setup in the market?

Chris: Yeah, it's been a fascinating, I guess, six weeks or so in the market. Really, post the Iran war, the market quickly priced in the higher oil prices, the resulting increase in inflation, the potential impact to consumer spending, and the knock-on effects that higher rates would have on housing and housing-related stocks. And so, the market corrected fairly aggressively. Then we get earnings season, and we saw fairly significant earnings revisions from a positive standpoint, and that forced some chasing. The market was effectively net short, as you would expect it to be with a conflict going on with Iran and the Strait of Hormuz closed. And we can't forget that, over time, this market becomes less liquid because of the passive share of holdings, meaning they're not really there to trade on a daily basis. Flows themselves are either driven by algorithmic mechanics and/or just the bi-weekly paycheck cycle. So, it's got to buy.

So then, we saw the market very offsides relative to some positive earnings announcements. The delayed impact from higher oil prices and really, what we're going to start to see the drawdown in product inventories globally wasn't going to hit until really right now, late May or late April, mid-May, and then into June. So you don't have all the negative consequences from the closure of the Strait of Hormuz. You have a market very offsides, and you've got passive flows that are going to create a rally in an illiquid market, and they're going to start to chase each other.

And so we just saw a very powerful rally associated with that. You saw people who probably got net short or increased their shorts post the beginning of the conflict. Then, when they're offsides and the market's rallying, they've got to de-gross. So, they're selling what they own and they're covering their shorts, and we've just seen an incredibly powerful rally accordingly.

So, the last three days, we're starting to see some rebalancing of those books. And we're starting to deal with, as we've seen over time – we saw this in the first quarter of '25. You have a fairly illiquid bond market, sovereign bond market. And now we've got inflation expectations that were going to be hovering around 3%, that are going to go through 4% in the next two months. And I don't think it's time to panic longer term about the inflation outlook, but clearly, we have upward pressure, and we're just not getting resolution to the supply shocks that are emanating out of the closing of the Strait of Hormuz. So again, a lot of volatility. I think we'll get through this. We'll look back and go, some of the rally’s justified, some isn't, and that is not... we'll give it all back and then some. So I expect volatility not only to be with us here for the short term, but it'll probably be with us for the rest of the year as well.

Dan: All right. You touched a little bit on inflation. I want to go back to that. So, with inflation picking up and we're starting to see growth accelerating, is this something that investors should be concerned about, specifically over longer-term inflation?

Chris: Yeah. Look, my concern, I just thought the timing was terrible. Not that there's ever good timing for a military conflict and the closing of the Strait of Hormuz, but my concern with it was the upward impact it was going to have on oil and its byproducts – gasoline, diesel, jet fuel – and then even in the soft commodities later. The oil price and its derivatives are one of the number one inflationary factors. And so 

And that's what we see coming through the data right now. We've seen it not just with headline CPI, but we've seen it with PPI, and we can see people trying to build inventories ahead of further price increases.

And so the psychology for the economy post the COVID stimulus is that inflation's a distinct possibility. You go back pre-COVID, and nobody believed you could generate inflation. Now that we've had experience with high single-digit inflation, and we haven't been able to get anywhere near the Fed's target in several years, there is rising inflation expectations. And so, yeah, I think we're going to monetise inflation.

My greater concern right now, because I don't think... I don't see in the forward data yet that inflation is going to accelerate aggressively beyond getting over four, four and a half percent, which is still too high. My concern is that we were set up for a re-acceleration in economic growth in Q1, solid growth in Q2, but at a lower rate of change because we're rebuilding inventories. It's not a lot of final demand except what we're spending on tech infrastructure. Which then means we're going to go into Q3, and unless we see a big correction in headline fuel prices with rising inflation expectations, inflation maybe not accelerating, but continuing to move higher and growth slowing down. And that's that stagflation-light scenario that everybody's so concerned about. And if that's showing up in Q3, you know, we could start discounting it as early as June, maybe July. But that's, I think that is the impetus for some of this correction. And then we've seen the liquidity injections that we were getting out of China abate as well.

So, globally, yields are increasing. There's no question. When we see rebalancing out of target date funds and other balanced strategies, they're probably going to be selling their equities and buying treasuries. So that's why I say, 

And, you know, to me, it's a time you're not trying to generate as much alpha as you are capture alpha, meaning grab this volatility and use it to your advantage when you see some dislocations. To the upside, harvest some gains, and to the downside, start deploying some capital.

Dan: All right, good. Well, that's a wrap for today. That sounds great. So thank you so much, Chris. I appreciate the insight, and we'll see you here soon.

Chris: Sounds good, Dan.