After a few years of synchronized global growth (which we already think may be close to its cyclical peak), it is tempting to see the tenth anniversary of the collapse of Lehman as a historic sign that we are returning to more “normal” times.
But global economy and markets remain deeply unconventional by historic standards—normality is not yet with us. Below are four reasons why the global markets are still profoundly distorted by the Great Financial Crisis and the unconventional policy measures that resulted from it.
1) Sustained outperformance of US equities versus the rest of the world.
The enduring impact of Fed QE, fast-growing technology stocks, and dollar strength have driven sustained outperformance of US equities. A key question for investors is whether this outperformance can be sustained.
2) Extraordinarily low real interest rates.
The Federal Reserve began raising its benchmark interest rate three years ago. It has raised the rate six more times since then, and twice since the new chairman, Jerome Powell, was appointed by President Trump. The Bank of England raised its Bank Rate above emergency levels in August.
This noise around interest rate movements should not mask the fact that the rates remain historically low.
3) Central Bank balance sheets remain enormous.
Although they have fallen marginally of late, Central Bank balance sheets have barely begun to return to normal. The collective balance sheet of the Federal Reserve, ECB, JCB and BoE stood at less than $4T in 2006. This doubled by 2012 and approached $15B by early 2018. It has receded very slightly since but remains unprecedented.
4) Correlation isn’t what it used to be.
A diversified portfolio, historically regarded as the cornerstone of investment, has been less of a diversifier than it was before the GFC. The see-saw of equities versus bonds is not functioning.
Diversification appears harder to achieve, as QE and other unconventional policy measures have distorted appetites.
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