Talking Bull

Believe it or not, we are halfway through the year. Also somewhat unbelievable is that there is talk of a new equity bull market being underway. Could it be, given all the uncertainties and macro headwinds?

Bull markets are always born in fear and doubt and grow up climbing a wall of worry. There are always pessimists who say markets are rising too far, too fast. In that sense, the recent rally is completely consistent with past bull markets. The market is forward-looking and does not wait for the economy to bottom out. It rather anticipates the profits companies will generate when the upswing is eventually underway.

Where the current episode is different to past early bull markets is that the recession has not happened yet, at least not in the US, the largest and most important economy. Importantly, central banks are still hiking interest rates.

Economists have been warning about a recession for many months now, so it is possible that the market has discounted it and is moving on, focusing on the post-recession recovery. But that would ascribe a far-sightedness to the market that it normally lacks. Its ability to look forward is usually counted in months, not years. The fact that rates remain high is not trivial. One of the reasons the economy and the equity market can usually quickly recover from a down cycle is that these are associated with a much lower cost of borrowing.

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