Investors have enjoyed stellar performances over the last twelve months. A 60/40 traditional global equity/bond portfolio1 returned around 19% on a one-year horizon, well above even the rosiest expectations of the recovery from the Covid-19-induced slump. The S&P 500 is up +100% from last year’s bottom – an iconic figure that says a lot about the buoyant market sentiment.
At this time of year when we go back to school, market uncertainty is rising not only because of recent news about the Covid-19 Delta variant, but, more importantly, because new elements are emerging in the battle of the narratives underpinning financial markets. One narrative becomes dominant until a new one challenges and then eventually replaces it, triggering a regime shift. As narratives are connected with expectations, they play a critical role in shaping valuations, their equilibrium, and their excesses.
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