A recent Bloomberg article argues that after “blanking out the noise from American and European politics,” and pandemic news, the markets are signaling a “classic cyclical recovery.”
The article outlines the following “tell-tale” indicators:
- North Asia’s export-led markets boomed this month, with South Korean and Taiwanese stocks leading all others for the year.
- Industrial metals are up—specifically, iron ore has risen by 50% this year and copper is at a seven-year high.
- Across developed nations, transportation stocks are up “comfortably” for the year and have “now overtaken the market.”
- The S&P 500 is outpacing the performance of long-dated Treasury bonds for the year (after a dramatic tumble of stocks compared to bonds earlier this year).
The article characterizes the trends as “remarkable, because we are beginning to get a handle on just how drastic the economic contraction spurred by the virus has been.” Citing data provided by financial historian Jim Reid of Deutsche Bank, it notes that this year’s economic contraction in real GDP was “the worst ever.”
Regarding what’s ahead, the article predicts a “remarkable rebound” but notes that we all must face the corollary that while stocks are up, they have “borrowed returns from the future,” adding, “That is fine; it’s what stock markets are supposed to do. But it means that we should moderate expectations for the next few years.”
The article concludes that “the markets seem to be telling a consistent story. After a big shock, lots of money was loosed on the economy; that is already leading to a cyclical recovery; and we can expect it in due course to lead to inflation, and to lower earnings multiples on stocks. There is much more complexity to global markets than that, but we shouldn’t lose sight of that message.”