So ... entering 2021, risk was the thing to buy. Why?
Let's not dive into the usual pool of indicators and estimates. Let's put the question differently: What did not cause markets to be so exuberant?
It certainly wasn't the pandemic. Consecutive waves of new mutations have caused infection rates to go up every time we thought we might have it under control. Towards the end of 2021, omicron was on everybody's lips, if not already in their respiratory organs. Covid-19 turned out to be much worse to combat than most of us thought – or hoped – a year ago.
It wasn't an unexpected upswing in GDP growth. Yes, in the first few months of 2021, growth estimates were being raised. The economic rebound was well under way, fuelled by remarkably expansionary financial and monetary policies. Since then, however, they have rather been adjusted downwards. Port congestions due to partial lockdowns and critical raw material shortages have led to severe delays in supply chains across the world, lowering output growth simply because the goods cannot be produced or delivered.
It wasn't the subdued inflation rates. In most of the developed world, consumer price indices have reached growth levels we thought were a ghost of the past. In the US, with the headline inflation now at 6.8 per cent, similar levels have not been seen since 1982. The core inflation, at 4.9 per cent, is not much more of a comfort.
It wasn't the low interest rates. During 2021, market rates rose for pretty much all maturities in all major markets. The relevant central banks have long warned of higher key rates and tapering at the long end. It has been clear to everyone that this is going to happen, with rising inflation driving home the message to the oblivious. And in some countries, it has already started to happen. In Norway, a not so random example, the key rate has been raised twice in the past four months.
It wasn't a sudden wave of geopolitical calm and peace. I dare say it never is. Unrest may cause some hiccups, but absence of bad news seldom has the power to lift markets substantially.
Desperate to hear some real causes? Let's sketch this much: Despite obstacles in the real economy, earnings have been strong. And too few investors were sufficiently optimistic to buy into that scenario at the outset of 2021.
There you go (again): There's nothing like a healthy dose of pessimism/scepticism/wariness (have your pick) to produce lavish returns.
Finn Øystein Bergh
Chief Economist & Strategist
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