McGeever: Wall Street's "escapism" is irrational but logical.
It has never been more 'wider' or 'puzzling. Investors and policymakers seem to live in parallel universes. There is no sign that they will ever converge.
Investors barely blink as world policymakers gather in Washington, DC for the International Monetary Fund's and World Bank's Spring Meetings. They fret about global imbalances and energy security, war, and the collapse of the international order.
The Iran conflict will likely cause growth to be lower than expected this year. Energy costs, inflation and uncertainty will also rise, as will interest rates.
The S&P 500 has risen 11%, and the Nasdaq 16% from its lows on March 31. Both indices reached their highest ever levels on Wednesday.
This apparent disconnect can be explained by a number of different factors.
One is psychological. Investors have been told since 2008 that "buying the dip" is almost always a good idea because authorities will eventually step in to protect asset prices and maintain financial stability. This is a modern version of the "Greenspan Put."
This is evident in the monetary and fiscal "bazookas", which were launched to combat the global financial crisis.
Investors bet on the "TACO" trade (Trump always chickens out) - that the U.S. President will tone down his?most egregious threat. This strategy has been successful so far. According to one policymaker, the markets have become "de-sensitized", or less sensitive, to Donald Trump's fiery speech and controversial policies.
Wall Street has been outperforming for decades, thanks to bulletproof earnings forecasts and the artificial intelligence boom. All of these factors have put a firm floor under U.S. stocks, or should we call it a "springboard"?
You can now see why the selloffs in stocks are so short-lived even though geopolitical and political uncertainty are high and risks are diverse and numerous.
NO OFF-SWITCH, NO OPT-OUT
Perhaps markets are wise to not panic. Adam Tooze is an economic historian at Columbia University. He says that the "geopolitical" world has cried the wolf for so long in the past few years, investors have grown numb to these doomsday cries, and are also numb to Trump's unpredictable and erratic behavior.
"We live in a world full of cognitive dissonance." There are two different worlds. The world as we have known it is over for policy makers. It's a continuation for those in the markets - keep trading," Tooze said on a panel during the Institute of International Finance Conference in Washington, on Wednesday.
Tooze calls this "escapism", which is not to be confused with denial. Investors who manage other people's funds have to make decisions and take positions daily. They cannot opt out. Tooze said that there is a need to maintain normal functioning in an abnormal world.
There are also real performance risks to reducing the risk, especially at a time when geopolitical turmoil is not yet reflected in corporate income statements. Asset managers don't want to be in the middle of a huge momentum trade.
This latest surge of optimism is based on logical reasoning. The latest wave of optimism is largely being fuelled by U.S. earnings that are exceeding expectations and the consensus growth forecasts for the next three quarters.
There's also the expectation or hope that the ceasefire agreement between the U.S., Iran and other countries in the region will hold and turn into a more permanent cessation of hostilities. Investors bet that this will lead to a reopening of the Strait of Hormuz and a possible significant fall in oil and gas prices.
Tooze's "escapism", however, may be the key. Oil, jet fuel, and fertilizer prices will be higher than investors expected on February 27, due to the disruption of supply caused by the bombings in the Middle East.
Helima CROFT, managing director of RBC Capital Markets said: "Many participants in the market are still not really coming to terms with this type of destruction caused by war." "There is no light switch."
Middle East energy can't be switched back on instantly, and not as quickly as investors can shut off negative news.
Save the date! On April 23, at?1300 GMT/9 a.m. ET, ROI columnists Mike Dolan, Jamie McGeever, and LSEG will host a webinar entitled "ROI Markets: Rethinking Safe Havens in Uncertain Times". Sign up by clicking here.
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(source: Reuters)
