Investors have enjoyed stellar performances over the last twelve months. A 60/40 traditional global equity/bond portfolio returned around 19% on a one-year horizon, well above even the rosiest expectations of the recovery from the Covid-19-induced slump. The S&P 500 is up +100% from last year’s bottom – an iconic figure that says a lot about the buoyant market sentiment.
At this time of year when we go back to school, market uncertainty is rising not only because of recent news about the Covid-19 Delta variant, but, more importantly, because new elements are emerging in the battle of the narratives underpinning financial markets. One narrative becomes dominant until a new one challenges and then eventually replaces it, triggering a regime shift. As narratives are connected with expectations, they play a critical role in shaping valuations, their equilibrium, and their excesses.
So far this year, we have seen the continuation of the never-ending monetary umbrella narrative, coupled with the great recovery lifting risk assets. The euphoria around this exceptional rebound in growth has led to the idea
of a more structural economic and earnings boom propelled by the technological advances that accelerated during the Covid-19 crisis (somewhat mirroring the experience of the ‘Roaring Twenties’). No doubt, the battle of narratives will see a winner forming a fresh new consensus, through a sort of discovery process, around the key question: what will be left of the consensual rebound in activity and inflation?