As a result of this, the firm said, investors appear bullish again as they are less concerned about the possibility of a rate shock.
However, BAML added: “Extreme levels of monetary stimulus and rates threaten periodic bouts of volatility in 2015. Should an EPS recession continue, default contagion occur and/or, investor disobedience emerge (central banks tell the markets to do one thing and they do opposite), volatility is likely to spike, in our view.”
But, how likely is it that the earnings recession will continue or, indeed that ‘investor disobedience’ will emerge?
Dealing with the second point first, one possible answer could lie in the continued presence of deflation, despite central banks throwing everything and the kitchen sink at it.
Speaking on the Brewin Dolphin podcast earlier this week, Fundsmith CEO, Terry Smith, said, contrary to expectations of inflation, zero interest rates and the quantitative easing that have accompanied them have resulted in deflation.
“I think the people in charge are going to keep the pedal to the metal till the side effects are worse than the illness,” he said, because they are waiting to see the inflationary effects of their actions kick in before they stop the liquidity taps.
Eric Lascelles, RBC Asset Management chief economist, in a note out on Thursday that tries to uncover the reasons why analysts have consistently failed to anticipate the extent of the deflationary trend in recent years, raises another possible reason.
“All of the logic in the world can argue that inflation should rise in the future,” he writes, “but if investors, businesses and consumers don’t believe it will, then it is all for naught. In other words, it is important that inflation expectations not be sucked down the drain alongside inflation.”
And, he goes on, while long-run inflation expectations have gradually become less agitated by swings in short-run inflation over the past few decades, “this heartening trend may have partially reversed in just the past few years based on some fresher (but less precise) analysis we have conducted.
