The Odd Man Out

It has become increasingly fashionable to direct scorn and ridicule at the so-called equity Perma bears. This is understandable, to a point. These hardened observers and investors have thrown everything at the market, only to see prices go higher almost tick-for-tick with the intensity of their objections. Their curse is increasingly obvious. They can succeed intellectually only if they bite the bullet and buy the very uptrend that they so despise. Alternatively, they can change their mind and embrace the bull market, which would probably have every other investor running for the hills. The market, by implication, would cave in, but they would not be able to claim intellectual victory as those who saw the crash coming, let alone profit from it. Whatever fate awaits the equity bears in this cycle, I am starting to warm to their disposition, at least for the purpose of judging equities in the next six months. As such, while the onus usually, and justifiably, is on the equity bears to explain why it is that the market is compelled to spontaneously combust, the burden of evidence is now increasingly shifting to the bulls. Why is it exactly that global equities are ordained to push ever higher in an environment where fundamentals and other markets suggest that they shouldn’t?

Consider the following story. Growth in the global economy has been slowing in the past 12 months. A weighted average of GDP growth in the U.S., the Eurozone, the U.K. Japan and China averaged 2.2% through 2019, down from 2.9% and 2.7% in 2018 and 2017 respectively. As a result, trailing earnings of global equities are now about 5% lower than at the beginning of 2019. Prices, however, have increased by nearly 28% over the same period, a feat that’s been made possible by a major rerating in the multiple investors are willing to pay for exposure to equities.

I have spent considerable virtual ink on these pages to explain this shift. It is tied to a regime change in monetary, and increasingly, fiscal policy. This theme has been crystallizing since the start of last year, but it now seems fully formed. The idea is simple; not only will policy remain loose for longer, but it will also be used to cap downside risks quicker and more aggressively than before. Even with this in mind, though, the recent performance of global, and especially, U.S. equities is extraordinary.

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