The recent volatility in the markets is perplexing after what has been a very good quarter for earnings and a very good quarter for US economic growth. As my friends in the music industry say, "What's up with that?" Why are we experiencing this and what does it mean for the rest of the quarter?
Taking a look back for context, the world stood at the abyss and then stepped back with over $12 trillion in global stimulus coming from governments and central banks. This was done to offset the dramatic drop in the global economies and to offset almost $1.7 trillion in losses/writedowns from the largest financial institutions around the world. From credit support programs to monetary easing to fiscal stimulus, governments pumped it up like Hanz and Franz. Global stock markets recovered sharply as did global production.
But the recovery came from extremely low levels as did the recovery in earnings. After reaching a peak in the fall of 2007, German industrial orders are still down about 25%. UK manufacturing output is still down 10% yoy. From a peak of 17 million a year in 2005, US car sales have "stabilized" at 7 million. This list goes on, but the point is that we have seen economies stabilize, but return to pre-2008 growth levels outside of China/Australia/India does not look promising nor imminent.
Markets have recovered on the anticipated fruition of the massive stimulus positive impact, but we are left with the question of the GNR "Where Do We Go Now"from here? Following this, the themes for Q4 are: what will grow revenue, will the consumer spend, and will central banks begin exit strategies.
Yes, Q3 had 3.5% GDP and a large majority of companies beating earnings due to cost cuts. However even if the most optimistic economists are upgrading their economic growth forecasts for GDP to 4% for Q4, this is still well below levels of a normal recovery if it happens. If it's wrong or misses to the downside, then the expectations the markets have built in for strong growth will be disappointed. The point is the upside is small in this scenario.
The story is the same for the overall demand for risky assets vs demand for safety assets.
Therefore, this translates into profit taking on long equities, short US dollar, and short duration. Unlike GNR, I'm not suggesting we break up the band/equity rally for 10 years and fight over hair styles. But at the minimum, I think we'll spend a quarter fighting over the direction for the economy, for earnings, and for the US dollar. It's healthy, it's necessary, and it's not necessary to go all in for the US at this moment.
Andrew B. Busch is Global FX Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and