Markets overreact to swings in macro outlook

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The financial markets pendulum will continue to swing from one extreme to another, writes Thames River Capial's Peter Geikie-Cobb and Paul Thursby

A distinguishing feature of financial markets over the past eighteen months, and in our view a recurring future theme, is how dramatically the pendulum has swung to price in the extremes in the macro outlook. The aggressive monetary policies adopted in late 2008 and early 2009, particularly the introduction of quantitative easing by the Fed, saw markets shift rapidly from discounting Armageddon to successful reflation. Ten year US treasuries yields rose from 2% to 4% from the start of 2009 to June of this year. Over the same period, the S&P 500 had rallied 80%, break even inflation ra...