“The main factor behind the global ebullience [for equities],” notes Andrew Adams of Raymond James, “appears to be a collective confidence that the low-interest rate environment is going to continue for the foreseeable future.”
But that’s also a clue for thinking that economic growth will be weaker generally. The risk-on trade for equities, in other words, may be less compelling than last week’s pop in stocks suggests.
The markets will continue to walk a fine line. Slow growth will hang over the world economy for the foreseeable future. But that means that the odds will stay low for squeezing monetary policy, in the US or anywhere else. Deciding if this amounts to a net plus for risky assets will remain a tough needle to thread. Perhaps, then, it’s reasonable to assume that animal spirits will wax and wane for the near term with muted price trends overall. The economic outlook probably isn’t as dire as the pessimists anticipate, but breaking free of moderate (and in some cases tepid) growth isn’t going to be easy.
As a result, the latest rally in stocks looks less like the start of a new sustainable uptrend vs. a bounce back from the a wave of pessimism that went a bit too far. Until the macro backdrop offers more convincing support, the markets may be destined to suffer a fair amount of churning as the crowd struggles to find a narrative in the noise.