Exciting new restaurants or holiday destinations are mostly doomed from the outset. Either the hype exceeds reality or they become ruined by their own popularity. The same can be said of the enthusiasm that has lifted many global equity markets by more than 40 per cent since the beginning of March.

Rally ho!

For a start, the so-called “reflation story” is causing the price of everything to go up, except what counts. Partly on the hope of a resumption of economic growth, the oil price has doubled since February and cyclical commodities have surged. But this will hit wallets and already-battered company margins. Meanwhile, the reflation trade for some investors has become the inflation trade, causing a steepening of yield curves just as economies are screaming out for credit. Any further rise in mortgage rates will also cause more damage to property prices – crucial to bank balance sheets and consumer spending.

So this is a self-harming rally. But its strength has been overplayed in any case. This is not a restaurant struggling with overcrowding; it is merely one emptying out less fast. Barely a single economic indicator in the US, for example, has turned positive: retail sales to employment numbers to factory orders are all still falling. And before bulls reply that it is inflection points that count, remember that around the world the mitigation in the decline of some economic data has been due to trillions of dollars spent on stimulus spending, plus rock-bottom interest rates.

So liquidity can work miracles. But monetary and fiscal policy cannot remain on steroids forever. With the great deleveraging of western household balance sheets barely begun and corporate profits still falling, this “recovery” will struggle to stand on its own two feet. Yet the forward price/earnings ratio of the S&P 500 at 16 times is now above its four-year average. Among emerging markets, Brazil’s is too, and its trailing p/e is twice as high. Investors had better hope this rally delivers an almighty earnings recovery – and soon.

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