Forex Flash: Rise in US equities no enigma – Goldman Sachs

FXstreet.com (Barcelona) - US indices have hit new highs again. What has made this puzzling for many is that the rally has come – at least until the last few weeks – alongside soft data and underperformance of cyclical equities. According to the Economics Research Team at Goldman Sachs, “We think the puzzle is exaggerated – a post-bust recovery, weakness in non-US growth and falling yields have all helped this pattern since mid-2011.” Global data has decelerated, while G4 monetary policy has eased again.

Nor is a rally that is not “cyclically driven” as unusual as recent anxiety – and the 2003-2011 regime – suggests. The mid-1990s saw a long period of strong US equity markets alongside cyclical underperformance, as did the mid-1980s. The case for US equities now is not primarily about strong growth, but about normalization of US recovery with an unusually large spread between yields on equities and the risk-free rate. “We forecast that this gap will close from both sides, with equities and bond yields rising. Moreover, cyclical underperformance should partly reverse, as it has recently.” the team adds.