Insight

More blackberry tart for 2021?

T con Zero

I don’t like self-referentiality, although the production of a regular series of notes sometimes makes it necessary. Today is one of those instances, because the literary reference to Agatha Christie’s short story Four-and-twenty blackbirds I made in my last note of 2019 (T con Zero #32, Four-and-twenty blackbirds and 2020) is still relevant as we approach the new year.

In the story, a man who has never had blackberry cake at a restaurant he regularly goes to, on a particular evening orders it, along with other courses unusual for him. Detective Hercule Poirot says: “You see, mon ami, where you went wrong was over your fundamental assumption.[…] A man under severe mental stress doesn’t choose that time to do something that he’s never done before. His reflexes just follow the track of least resistance. […] A man who dislikes thick soup, suet pudding and blackberries suddenly orders all three one evening. You say, because he is thinking of something else. But I say that a man who has got something on his mind will order automatically the dish he has ordered most often before.”

2020 has been a year in which I believe we were all under severe stress, as investors and most importantly as people. We had the pandemic, which is still ongoing. A contraction of global economic activity, provoked or exacerbated by the drastic containment measures of Covid-19 in many countries, seen only at the time of the world wars, and perhaps not even then. A collapse, between 26 February and 20 March, of most equity markets, that sent the S&P 500 into bear market territory, and dragged corporate and emerging bonds down into a sharp decline with few, if any, precedents. Then came a combination of enormous monetary and fiscal policy stimuli, which have fueled confidence in the economic recovery and improved prospects for financial markets. Since the beginning of April, the fastest and least interrupted recovery from a bear market took off, which brought the S&P 500 and Nasdaq back to new highs at the end of August and pulled up other markets, too.

Equity markets that seemed expensive at the beginning of the year may now seem even more expensive: the rebound from the bottom was driven by a valuation expansion, as the recession has demolished profits. On the other hand, expectations about earnings recovery are very positive and the aforementioned policy stimuli can contribute to justify them.

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