Markets’ Rose-Tinted World

This has been an unusual year for the global economy, characterized by a series of unanticipated economic, geopolitical, and market shifts – and the final quarter is likely to be no different. So why are financial markets behaving as if they were in a world of their own?

LAGUNA BEACH – This has been an unusual year for the global economy, characterized by a series of unanticipated economic, geopolitical, and market shifts – and the final quarter is likely to be no different. How these shifts ultimately play out will have a major impact on the effectiveness of government policies – and much more. So why have financial markets been behaving as if they were in a world of their own?

Apparently unfazed by disappointing growth in both advanced and emerging economies, or by surging geopolitical tensions in Eastern Europe and the Middle East, equity markets have set record after record this year. This impressive rally has ignored a host of historical relationships, including the long-established correlation between the performance of stocks and government bonds. In fact, correlations among a number of different financial-asset classes have behaved in an atypical and, at times, unstable manner.

Meanwhile, on the policy front, advanced-country monetary-policy cohesion is giving way to a multi-track system, with the European Central Bank stepping harder on the stimulus accelerator, while the US Federal Reserve eases off. These factors are sending the global economy into the final quarter of the year encumbered by profound uncertainty in several areas.

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