Central banks and governments across the globe rapidly shifted to an “all-in” approach earlier this year, attempting to construct a reflationary bridge to insulate private sector participants from the economic shutdown. The initial implication for investors was that the bear market in global equities was truncated. So far, this reflation strategy has worked, and investors have taken a huge leap of faith that policymakers will stay willing and be able to provide a durable bridge until corporate profits recover significantly.
As discussed in a just-published report, the risk is that the pandemic is not over and global economic activity will take a very long time recover. If so, then the reflationary bridge must be reinforced until the world economy reaches the other side. Any stumbles in the recovery, and euro area PMI surveys and the U.S. new unemployment claims report were disappointing last week, or questions about the resolve of policymakers develop, would risk a meaningful equity market shakeout.