Recovery Bulls Climb the Mountain

Recovery Bulls Climb the Mountain

“The hills are alive with the sound of music, with songs they have sung for a thousand years.” – The Sound of Music, Richard Rogers and Oscar Hammerstein II

Are we at the top of the mountain, or are investors still scaling the foothills?  As we celebrate the 4th anniversary of the global economic recovery and with world stock markets making all-time highs earlier this month, this is the number one question on most investors’ minds.

This economic recovery has been like no other, with as many cliffhangers, plot twists, villains and heroes as the finest of cinematic endeavors.  In fact, as we move into the summer movie release schedule, we can’t help but think of the last 4 years of economic recovery in the context of a significant film franchise – part drama, part comedy and with a fair bit of suspense and horror mixed in along the way.  In retrospect, it might look a little like this …

Following the 2008 blockbuster release of “The 100 Year Flood”, the unanticipated disaster film chronicling the final days of the Great Housing Bubble and the almost biblical cleansing of leverage and greed throughout the system, investors began their long road to recovery.  Realizing that everybody who saw that film never wanted to see it again, the producers of the franchise released the back-to-back, feel-good thrillers “Easy Money” and “Kick the Can Down the Road”.   Both of these Herculean efforts were groundbreaking in terms of their bold decision making and never before seen action scenes.  While not critically well-received by many in the industry at the time, the stars of those films are now widely credited for the successful box office receipts the franchise is currently enjoying.

After the single-day release of “Flash Crash”, about a series of vulnerable computers on a three-minute bender on a Thursday afternoon, the 2010 summer release of “Eurozone Break-Up” was a return to the suspense genre for investors.  For many it was too much, too soon for them to handle… but the story of the relationship between northern Europe and southern Europe, and whether they should seek a divorce over irreconcilable differences, caught investors’ attention.  We would have to wait for the sequel “Eurozone Break-Up II” the following summer, for a more dramatic and satisfying conclusion as the leaders of Europe took a page from ‘Braveheart’ in defending their sovereign rights to the very end.  It was a perfect example of that rare occurrence in which the sequel is actually better than the original.

Spanning this period, the lesser known cult-classic “A Flock of Black Swans” came to market, documenting investors’ tenuous grip on reality as immediate rear-view mirror images of 2008 colored their collective memories.  The screenplay covered Chinese economic growth concerns, state budgetary constraints, the fits and starts of a choppy recovery… all filmed in beautiful cinematographic style in a variety of geopolitical hot spots around the globe.  In a surprise ending, the main characters miraculously outmaneuver a seemingly inescapable living nightmare, though the feel-good outcome was substantially due to the generally lowered expectations of audiences everywhere.

As the film franchise matured, it took on US fiscal policy, chronicling it in 2011 with the opening summer installment of the movie, “Debt Ceiling”.  The downgrade of US debt after the default brinksmanship in Washington made investors’ jaws drop but contained a clever plot twist – interest rates on Treasuries fell to all-time lows, creating a positive stimulative effect on the economy!  The holiday sequel, released at year-end 2012, was shot as an old-fashioned Western showdown, titled “The Fiscal Cliff:  Debt Ceiling II”, ending with feel-good holiday compromises on a number of tax and spending issues for the country.

This quarter’s premier of “Sequestration”, a film loosely based on the life and times of Sequester, the overlooked thoroughbred race horse that is the US government, was a well publicized event that became a hugely popular media sensation, managing to lock in place $85 billion in annual spending cuts beginning in 2013.  While successful in outcome, market audiences greeted the actual release with a collective yawn.

The combination of these final three films ushered in the release of the “New Normal”, a film that made no apologies for lower growth and lower returns on a going forward basis.  Although it took 4 years to produce, the audience wasn’t too sure what to make of it.  While normally a new record high in the markets would be wildly celebrated, this time around it just seemed a little nonplussed.

Looking forward, the market is anxiously awaiting the latest quarterly installment of the reliable but incredibly dry series “Earnings Season” which is playing alongside of the long anticipated “The Return of Normalcy”, an epic fantasy drama that chronicles the final installment in a long running series marking the end of the “risk on, risk off” environment.

The good news is that the best of the franchise is likely just getting started.  The optimistic and triumphant film entitled “The Great Race” is rumored to chronicle a resilient and accelerating private sector in the face of fiscal contraction, reflecting the persistence of the human spirit as the US finally escapes economic purgatory, a view also reflected in the stock market.

The producers are also considering whether or not they will need to release the remake of “Inflation Genie”, the story of an old foe that central bankers try to keep in check, and investors try to beat – but with a new twist as this time around some of the developed world’s biggest central banks try to deliberately conjure and control this powerful spirit.

We have made great progress over the last 4 years.  Our banking system is on stronger footing, corporate profitability and valuation metrics remain healthy, particularly for equities versus low-yielding bonds, and the labor and housing markets are slowly improving.  But we also face slowing economic momentum as stimulus measures begin to wind down and the economic recovery naturally matures.  Additionally, at the time of this writing, numerous geopolitical events are percolating and policy-makers around the globe are re-thinking some aspects of their approach.

Movies are ultimately an escape, a luxury pastime with parable-packed screenplays and satisfying story arcs.  And though markets are rarely as entertaining to watch, let alone as predictable, the reality is while there are reasons to be optimistic about the long-term market outlook in the years to come, we also must acknowledge the risks that now exist in the current environment.

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