Great Expectations

Great Expectations

Joe Biden assumes the presidency with a daunting task vis-à-vis markets or, perhaps vis-à-vis markets’ expectations is a better way to put it.

US equities are perched (some say precariously) at or near record highs, and multiples are, in some cases anyway, stretched to levels last seen at the height of the dot-com frenzy.

Some worry the road higher is fraught with peril, the Fed’s best efforts to sustain the rally notwithstanding.

In his inaugural address, Biden spoke of the need for unity in the face of what he, I think correctly, characterized as a set of challenges more collectively daunting than anything the nation has seen in at least five decades, and perhaps since World War II.

Not least of those challenges is restoring the economy and ending an epidemic that continues to claim thousands of lives every 24 hours. Biden led the nation in a silent prayer for the 400,000 (and counting) dead to the virus.

It’s trivial to speak of asset prices in a vacuum on days like Inauguration Day. But it’s not trivial to speak of markets on historic days if one can place them in the correct context. That context is readily ascertainable this week.

Markets are priced for better days. They’re priced for an economy that’s poised to rebound once vaccine rollout is complete. They’re priced for a return to predictable US foreign policy. And, of course, they’re priced on expectations of stimulus and ongoing Fed accommodation by way of Biden’s decision to install Janet Yellen at Treasury, thus ensuring coordination between the two policy “puts,” both fiscal and monetary.

“Beyond the near term, the Fed has created one of the most fertile environments for growth and inflation that I’ve ever seen, and between that and fiscal stimulus, the outlook in the quarters ahead is very positive,” former Merrill Lynch trader Tom Essaye, founder of “The Sevens Report,” said.

That outlook is shared broadly. And it’s reflected not just in asset prices, but in anecdotal accounts and surveys, too. I saved a few highlights from BofA’s latest Global Fund Manager Survey (out Tuesday), to help make the point.

Inflation expectations among participants in the poll are the highest ever. “A record net 92% of FMS investors expect higher global CPI in the next 12 months, up 13ppt this month,” the bank’s Michael Hartnett wrote.

That, in the midst of an ongoing pandemic which, at least for western economies, is now more acute on virtually every metric than it was during the first wave.

At the same time, BofA noted that investors’ global growth expectations rose by another percentage point this month to a net 90%. That’s the third-highest reading ever.

Again: This comes in the middle of the worst public health crisis in a century.

The survey is full of similarly ebullient reads on investor expectations and sentiment. For example, a record 41% of respondents think small-caps will outperform over the next year. Cash levels are near record lows. Risk-taking near all-time peaks. And so on, and so forth.

These expectations set the bar extremely high for Biden and Kamala Harris.

I suppose the bright side is that while it’s a long way down for risk assets from here, the country surely hit rock bottom earlier this month.

In that sense, the only place to go is up.


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