John A. Rizzo
Are we entering a "bad Goldilocks" era? The phrase was used at least twice on Tuesday by high-profile strategists – once by Ed Yardeni and another time by Michael Hartnett, chief global equity strategist at Bank of America – and it seems to apply to the same idea: The economy is not too hot and not too cold, it is juuuuuuust wrong.
As Mr. Hartnett explains: Bad Goldilocks is an economy that is "neither 'cold' enough to provoke the quantitative easing that risk assets are now so cravenly dependent upon, nor 'hot' enough to provoke losses in fixed income markets that would inspire a wholesale rotation out of bonds into equities and commodities."
The stock market seems to be reflecting this idea. Stocks had been struggling recently over signs from the Federal Reserve that it is in no rush to implement another round of monetary stimulus, given the relative strength of the economic recovery in recent months. But now that the economy is again sputtering – if last month's disappointing payrolls report is any indication – stocks are reflecting little hope that the Fed is going to come to the rescue. In afternoon trading on Tuesday, the S&P 500 was down nearly 1.6 per cent, to 1,361, and on track for its fifth straight decline.
For what it's worth, though, the "bad Goldilocks" metaphor seems to be a bullish one, because neither Mr. Yardeni nor Mr. Hartnett believes markets are seriously threatened at this point. In his note to clients, Mr. Hartnett said the decline in the S&P 500 should be limited to a range between 1,300 and 1,350, and he's sticking to his idea that we are on the verge of a "great rotation" out of bonds and into equities.
"In the simplest terms, we believe the multi-decade bull market in bonds is slowly coming to an end and will be replaced by a multi-year bull market in equities," he said.
However, it could take some time: "At this point, the necessary catalysts for such a move are missing: an end to the era of deleveraging and a normalization of real estate, labor, and monetary policy (ie, no QE3 and a Fed rate hike). Only if the Fed is willing and able to raise rates in the next 12 months should investors consider radically altering their asset allocation, in our view."
David Berman