The bounce off the October bottom in stock prices has been impressive. What happens now?
T he strong rally in stocks in the last few months means that the undervaluation in stocks has largely been erased. Further price gains may be harder to come by, but it is premature to anticipate another stumble.
In fact, according to our Global Investment Strategy service, the biggest surprise may be that the rally will carry on further than most anticipate.
This year a change is clearly underway: There is hardly any central bank that is still in tightening mode. Instead, the leading central banks such as the ECB, the Bank of Japan (BoJ) and the People’s Bank of China (PBoC) are leading a new reflation cycle. Our advance/decline gauge of global central bank policy is at record low levels, indicating the massive breadth of easy policy.
Although it is too soon to expect reflation to stoke growth due to a time lag, expansive monetary policy almost always eases equity multiple compression, allowing stock prices to rise.
True, technical indicators are not nearly as bullish as they were in October, but there is nothing to suggest that the rally will be cut short imminently.
Bottom line: Monetary reflation is a key support for risk assets. With virtually all central banks in easing mode, and in the absence of negative exogenous shocks, the tendency will be for stock prices to rise.