How far does the stocks boom get?

Let’s pick up the ongoing debate over what kind of market cycle this is. Readers will know I have been juggling three narratives to explain the ongoing market boom as it confronts an economic boom:

  • Bad news is good news meaning the ongoing deflation (after a brief spike) will ensure asset prices outperform the economy.
  • Good news is bad news meaning the stocks boom will go bust as inflation and yields rise.
  • Good news is good news meaning expensive stocks can weather higher rates because the profits boom is real but there will be violent rotations under the bonnet.

Goldman is still the outstanding example of the first regime:

Three macro issues have dominated investor discussions about the US equity market since the start of the year: rates, inflation, and taxes. Interest rates have been the most important of these topics. In a rising interest rate environment, short duration outperforms long duration in both fixed income and equities. In fact, of all our thematic baskets, duration has been the best long-short trade, posting a+25%return since the start of 2021 (see page 17). A sector-neutral portfolio of short duration stocks(GSTHSDUR) has climbed by +24%YTD compared with a-1%return for a long duration portfolio (GSTHLDUR). As Exhibit 1 shows, duration has been a major contributor to alpha generation.

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