Citi seems to think so
We're far from the depths of the pandemic bottom but the good times haven't arrived yet. At the same time, we can now see what's coming. US growth expectations have repeatedly ratcheted higher this year and are now in the 6-8% range.
Rather than talking about low rates and fiscal stimulus forever, we're talking about tapers and tax hikes.
Is all the good news priced in?
A lot of it certainly is but a bull market doesn't die of old age. Until there's meaningful monetary or fiscal tightening, there is no alternative to equities. I worry about the leverage and risk of brutal drawdowns but so long as Fed funds are at 0.10%, it's tough to keep negative pressure on equities. In turn, the global risk and reflation trade should continue to work.
The main risk is that something goes wrong and Citi has a few examples of what could derail sentiment in a note today:
- Inflation
- Taxation
- Fed moves
- Profit expectations too high
- Vaccine-resistance strains
- A problem with Biden's infrastructure bill
I sympathize with everything on that list but I just don't see the case for cowering. Citi also notes that its Panic/Euphoria model is in euphoric territory but that should surprise anyone. It's calling for a 10% drawdown.
"The risk/reward ratio seems unfavorable," they write. "Arguments that low interest rates sustain high multiples fail to encompass loftier equity risk premiums that have structural rationale, including sovereign debt increases and western economy demographics."
For me, the only global risk worth worrying about right now is inflation. The demand boom coming out of the pandemic will reverberate around the world for at least the next year, causing an intense period of demand that will tip nearly all global resources into a deficit. That could feed back into a crimp on demand but it will be many months before that happens.
