So in Q1, you did some dip buying, didn’t you? Just admit it.
I mean somebody sure as hell did, because as Deutsche Bank notes, “the first quarter saw the post-election equity rally extend, putting it well into the top 10% by duration without a pullback of 3-5% that typically occurs every 2-3 months.” Or, visually:
So what’s behind all the optimism? After all, the central bank “put” is fading away…
… and a recently dovish ECB notwithstanding, you’re not going to be able to depend on the old BTFD, mean reversion strategy going forward where that strategy hinges solely on central banks’ propensity to step in whenever things get rocky.
Well, according to the above-mentioned Deutsche Bank, this is what you can thank for buoyant equities:
The rally was driven by a double peak in macro data surprises, which skipped a negative phase, led by a continued surge in confidence and survey indicators. The Fed hiked for a second time in 3 months, in the surest sign the rate hiking cycle was re-commencing; the ECB, conflicted on sequencing normalization, helped bring forward expectations of an end to negative rates.
Got it. So the question then is obviously this: “what’s next?” Or, as Deutsche puts it: “have confidence and markets run ahead?”
In short, the bank’s answer is “not necessarily.” To wit:
Key themes and catalysts for Q2
- Don’t fret policy gridlock. In our view the post-close-election rally in US equities followed closely the trajectory of past close US presidential elections. At the market level it reflected the pricing out of an uncertainty risk premium rather than the pricing in of expectations of policy changes or stimulus. With little priced in for policy changes, the long overdue pullback on the catalyst of a worsening in prospects for policy changes, in our view represents a buying opportunity.
- The soft vs hard data divide: the soft data is just catching back up to the hard data. More broadly, our index of soft data for the US fell below the hard data for the 1½ years following the dollar shock. It has simply been catching back up since the shock began to fade last summer. By itself therefore, since it began from a low level, the rise in soft data does not suggest the bounce in confidence and survey indicators are getting ahead of the hard data. It is the case that US surveys point to higher growth rates, which we continue to expect.
- The boost when confidence recovers: durables spending, capex and equity inflows. A large part of the recovery in confidence simply reflects the cycle as noted above. Confidence typically peaks for the cycle only when unemployment troughs. So confidence should continue to rise from here in our baseline of solid growth and the cycle having further to run. We have previously examined the impacts of consumer confidence purged for the cycle, i.e., the residuals from a regression of confidence on the unemployment rate. Cyclically adjusted confidence, with a 6- month lag, has been notably correlated over extended periods with real consumer spending growth, particularly on durables (56%); real private investment (53%); and inflows to equities (53%). While the cycle is a key driver of confidence and of all of these variables, the strong correlations and the lead indicates confidence provides an important boost over and above the cycle.
- Synchronized global pick up: breadth adds to magnitude and duration of rebounds. With the global PMI having moved up steadily since last June but still to very modest levels of 53.5, the synchronization of the recent rebound and with two of the big overhangs on global growth in this recovery now past, we see further upside and expect the rebound to last longer.
Or, in other words: everything is awesome.
Do not curb your enthusiasm.
And all that.