Headed into this year, a generic narrative about bullish equity sentiment went something like this.

Economic deceleration in the US and signs of moderating inflation across advanced economies would give developed market central banks the plausible deniability they needed to de-escalate rate-hiking campaigns on the way to a semi-coordinated “pause.” The disinflation process would broadly persist, even if it was accompanied by intermittent “scares.” And, as evidence of waning growth momentum mounted, policymakers would be free to pivot in the back half of the year, at least to a dovish cadence in public remarks, if not to outright easing.

Central banks were never on board with the back-half easing part, but they certainly hoped the disinflation process would proceed in line with various constructive macro outlooks. And between the Bank of Canada’s pause, a nod to pausing from the Bank of England, an almost pre-announced pause from the ECB (albeit accompanied by an explicit promise for an additional 50bps hike in March) and the Fed’s step-down to 25bps increments, the signs generally pointed in the direction of less aggressive policy.

Over the past two weeks, though, the viability of the bullish narrative as briefly described above was called into question. Although inflation in Europe is coming down, it’s still sky-high, and price growth in the UK remains very hot, even as doves found reason to cheer last week in a nascent moderation on the services side. In the US, January’s macro data was gangbusters, and that was reflected in less-than-encouraging CPI and PPI readings. In Australia, the situation is touch and go. On some days, the RBA sounds like it wants to keep hiking in perpetuity, on others not, but the ambiguity speaks volumes.

Suffice to say the balance of policy risks now tilts to “higher for longer,” and that’s ostensibly problematic if you define the bullish case as sketched above. “2023 bulls [are] driven by a pivot,” BofA’s Michael Hartnett said.

The figure above gives you some context for the scope and rapidity of last year’s global tightening. It’s also useful for what it shows about the policy bias that persisted for the decade leading up to the pandemic. Measured on a three-month rolling basis, central banks in both developed and emerging markets were net easing pretty much constantly for 10 years.

The math for bulls, Hartnett went on, is that the 416 rate hikes seen over the past two years “would end,” paving the way for a “new era of rate cuts.” He reminded market participants that from Lehman to February of 2021, there were 11,634 cuts.

The concern, he said, is that markets are ahead of themselves. 2023 might not be a “Goldilocks” year, but rather a year defined by the “re-acceleration of inflation and a restart” of the global tightening cycle. “Then it gets ugly,” he cautioned.

And yet, there’s a sense in which bulls adapted their narrative in 2023 to fit the circumstances. Effectively, they dropped growth deceleration from the list of preconditions for softer monetary policy. Instead of viewing surprisingly sturdy growth outcomes as a threat given the ostensibly hawkish read-through for central banks (i.e., “good news is bad news”), bulls interpreted signs of economic resilience as evidence that “long and variable lags” needn’t necessarily manifest in recessions (i.e., “good news is good news”).

That’s at the heart of the widely-discussed disconnect between stocks and bonds. Often, it’s not so much that rates are “smarter” than stocks, or that bonds “know something” equities don’t. Rather, it’s that rates are obliged to incorporate macro developments and duty-bound to reflect policy expectations.

By contrast, stock prices at any given time reflect a discordant collage of factors, ranging from the fundamentals to psychological phenomena associated with greed and despair. Although rates (and earnings) are a fundamental factor in determining stock prices, equities can, by and large, march to their own drum. Right up until the music stops.