Real vs Implied Reality

“For the last few years, the US equity market has soared through Q4 and into Q1 and macro-economic indications have trended with them in a virtuous circle ‘confirming’ that this time it’s different and recovery is ‘on’. Then just as investors get all bulled up, convinced by the market’s all-knowing-efficiency that the old normal is back and growth is returning, macro-economic data starts to disappoint expectations. This is initiallyshrugged off – “it’s a transitory dip”, “the market sees through this temporary weakness”, “where else are you going to put your money?” – and the stock buying continues through the Winter. But there comes a time, when the divergence from economic reality grows too wide and the ‘faith’ that the market knows best starts to fade; and sure enough, each time, the market drops back rapidly to reality. What is the common denominator for this winter surge?

Simple – massive global central bank bailouts/injections in the months just before winter that levitate the market (and psychologically create ‘hope’ that is then extrapolated into future economic expectations which then after a one- to two-quarter lag, leads to disappointment as real economic data can’t match the market’s implied reality).

2010-11…

2011-12…”

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