McGeever: Wall Street's "escapism" is irrational but logical.
It has never been more apparent that the Teflon-coated markets are not in sync with the growing catalog of geopolitical risks and economic uncertainties. Investors and policymakers seem to live in "two parallel worlds" and there are no signs of convergence anytime soon.
Investors barely blink as world policymakers gather in Washington, DC for the International Monetary Fund & World Bank Spring Meetings to fret about global imbalances and energy security.
The 'Iran 'war will most likely cause growth to be lower this year than expected. Energy costs, inflation and uncertainty will also be higher, as well as interest rates, than what was predicted on February 27, the day before conflict began.
The S&P 500 index and the Nasdaq both rose 11% and 16 % respectively from their March 31 lows. On Wednesday, they reached their highest ever levels.
This apparent disconnect can be explained by a number of different factors.
One is psychological. Investors have been taught since 2008 that "buying the dip" is almost always a good idea because authorities will eventually step in to preserve financial stability and support asset prices.
This is evident in the "bazookas", monetary and fiscal, that were launched to combat the global financial crises, euro-zone crisis, and COVID-19 pandemic.
Investors bet on the "TACO" trade (Trump always chickens out) - that Trump will back down from his most egregious statements. 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.
There's also the boom in artificial intelligence, bulletproof corporate earnings forecasts and Wall Streets decades-long outperformance. All of them have put a firm floor under U.S. stocks, or should we call it a springboard instead?
All of this explains why the selloffs in stocks are so short-lived even though geopolitical and political uncertainty are high and risks are diverse and numerous.
NO OPT-OUT, NO OFFSWITCH
Perhaps markets are wise to not panic. Adam Tooze is an economic historian at Columbia University. He says that the geopolitical world has been crying wolf for so long in recent years, investors have grown numb to these doomsday cries, much like they've become numb to Trump's unpredictable and erratic behavior.
"We live in a world full of cognitive dissonance. There are two different worlds. The world we know is over for policy makers. It's a continuation for those in the markets - keep trading," Tooze said on Wednesday at the Institute of International Finance Conference in Washington.
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 downsides to reducing risks at a moment 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 logical. The surge in optimism is mainly being fuelled by U.S. earnings for the first quarter, which have exceeded expectations.
There's also the expectation or hope that the ceasefire agreement between the U.S.A. and Iran will hold and lead to a broader, more lasting cessation in hostilities throughout the region. 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 come into play here. Oil, jet fuel, and fertilizer prices will be higher than investors expected on February 27, due to a long-term 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 not really coming into terms with the kind of destruction caused by this war." "There is no light switch."
Middle East energy can't be re-started in an instant. Investors can't turn off bad news as quickly as they can.
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)
