Remember the Rules

The Narrative™ is treading water at the moment, consistent with price action. The direction still looks decent for the bulls, but it’s getting a bit choppier, which is not a huge surprise. The global equity index is up by 35% since the lows three months ago, but the next three months won’t be as spectacular. This is not a huge insight, leaving the main question of whether equities edge higher, even at a slower pace. The simple stock-to-bond model discussed last week suggests that they will, by 5-to-6% over the next three months to be exact, but it’s probably best not to not hold me on that prediction. Meanwhile, investors and analysts continue to have the same tedious debate about the likelihood of a "V-shaped" recovery, and whether markets will sell off if we don’t get one. This conversation on occasion takes place at an extremely low level of sophistication, so just to make it clear. A V-shaped rebound in growth indicators and surveys, the latter which are often normalised around a trend of ‘zero' growth, is not the same as a full recovery in the level of output. Yet, the idea that markets will sell off if a V-shape in the economic fails to materialise is still presented with alarming regularity. I am not sure how it ever got to this. A full recovery of output always takes a long time after a recession, but markets don't wait around. After the financial crisis, for instance, real GDP in the US didn't fully recover until in the first half of 2011, at which point the MSCI World has already rallied by a cool 92% of its lows. In other words, markets trade on the margin of the data, and that margin is currently well-oiled by policy.

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