The old cliché is that the party in the financial markets continues until the central bank pulls away the punch bowl. The last decade was an almost non-stop party, and policymakers are trying to keep it going in 2020.
The Fed and ECB (and the other major central banks) will remain on hold this year, meaning that overall monetary conditions will stay very accommodative, even as economic activity slowly improves. The short end of the yield curve will remain pinned down, helping to slow the rebound in Treasury and Bund yields. Moreover, last year’s major economic threat – escalating trade wars – has been put on hold until at least after the November U.S. election. The offset is that the equity market has moved ahead of the likely improvement in global trade, earnings and manufacturing confidence. Equity multiples have expanded materially over the past year, leaving less of a cushion to absorb the threat of a pandemic and what is likely to be a contentious election year.