Why Have Markets Surged So Much? It All Comes Down To The 3 P's


Photo: Flickr/U.S. Missile defence Agency

BofAML’s Michael Hartnett has an excellent note answering the question: Why is the equity market up so much?Hartnett chalks it up to the 3 P’s: Policy, production, and positioning.

Policy, of course, refers to the actions taken by the ECB (and possibly the Fed) to crank back up the monetary stimulus.

Production refers to the quality of the data, which is no longer surprising to the downside. Weak data is no longer failing to incite treasury buying, as it did not longer ago.

Positioning refers to the fact that investors have been caught on the wrong side of this risk trade. Numerous investors have missed this rally.

And it’s for this last point that there seems to be a desire to want to hear that this can go on longer.

All the big analysts are being asked this how much longer question, and they’re generally answering that it can go a bit higher.

Here’s Goldman’s Dominic Wilson

With the summer rally extending, the key question is whether markets can still move higher. On balance, we think they can, but the risks are rising. The rally so far has been driven mostly by policy and its impact on compressing risk premia. While there is more event risk as decisions shift from the ECB to governments, we expect OMTs to be activated in the next few weeks and we anticipate a shift to QE3 this week. These moves are likely to keep the forces for easy financial conditions in place. What will now be needed is more evidence of cyclical improvement from the US and global data. News there has been more disappointing. Our view is that it will look somewhat better over the coming weeks. If that occurs alongside the policy tailwind, we think markets should move higher even from current levels. Without it, we doubt they can.

Back to Hartnett, we think this is probably the best summation of what’s gone on.

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.