Are the expectations of consumers and companies the best guide for future growth as often established by economists?
2020 is such an unusual year that traditional indicators used by strategists and allocators to gauge the economic momentum run the risk of sending strong misguided signals, blurred by both base effects and psychological effects. After astonishing macro surveys in July reaching the cycle high levels of 2017/2018, purchasing manager indices came back to more neutral levels in August, which could lead us to revise down our expectations for the Q3 recovery. The Bank of France has just sent a different message and upgraded its Q3 growth estimate to 16%. In a way, the cautious players are warming up whilst the momentum chasers are cooling down.
In this unusual context, new indicators based on artificial intelligence are being developed, such as mobility trackers, and suggest that Europe would be back to its February levels. It is hard to draw conclusions from these indicators, but globally, conflicting and bumpy data would generally favour, volatility of inflation expectations and currencies and more noise ahead of central bank meetings.
This is a bit what happened over the last two months, with some momentum on potential inflation normalisation driving a steepening of US and Europe rate curves. That moment did not last long, as in August inflation in the Euro Zone entered into negative territory and the European Central Bank (ECB) highlighted the deflationary pressure derived from a stronger euro.
The acceleration of the technological shift seems easier to have foreseen. In a low growth environment with many industries facing significant uncertainties, companies benefiting from endogenous structural growth drivers benefit from a valuation premium. However, something powerful is going on behind share prices. We may be just witnessing one of the most important value transfers in the last decades. After a significant transfer of value to oil makers in the 70s, telecommunications companies in the 90s, or banks in the 2000s, the technology structural cycle accelerates and captures now a greater proportion of S&P earnings, not only valuation. This is not a purely market story, but also a reflection of our daily lives which are - whether we like it or not - more and more digital. That should not come at any price though, and the recent technical correction is a healthy adjustment.
This period of acceleration is also an opportunity to change the ground rules. In the US, to avoid any debate on the relevance of a zero interest rate policy in a rebounding economy with inflation that could overshoot the 2% threshold in 2021, Jerome Powell basically changed the rules of the game and adopted an average inflation target, an idea that was already present in the vision of Janet Yellen, but never formalised.
One thing is certain: history tells us that crisis are generally times where country and industry leaderships change. In a nutshell, being short-sighted on inflation, volatility or technical analysis on indices is the best way to miss long-term transformations of capitalism called industrial revolutions.
Monthly House View, 17/09/2020 release - Excerpt of the Editorial
September 25, 2020