This must be one of the least enthusiastic market rallies in history. Shares are up about 20 per cent globally since they really took off in late November, yet buyers seem to be sitting on their hands. Volumes of US shares traded during this rally have been at their lowest, on a 30-day moving average, since the depths of the Great Recession in January 2009. Investors are not buying back into mutual funds focused on developed market shares, either – although emerging markets have proved appealing this year.
Even worse for those who hope that the equity rally is a portent of good times ahead, bonds have done next to nothing. The result is that the tight link between bond yields and share prices of the past decade has broken down; on Tuesday, again, bond yields fell even as shares mostly rose.
There are three ways to read this breakdown. The first, popular with bears, is that bonds are warning of tough times ahead. Flighty shareholders, on this view, have lost their heads over a few economic green shoots.
The second, popular with bulls, is that bonds reflect excessive investor fears due to memories of the recent crises; investors are so scared they are ignoring signs of recovery.
The third is that bonds are no longer sending a reliable signal, because they are manipulated by central banks. The US Federal Reserve and Bank of England are buying bonds outright. The European Central Bank will on Wednesday announce the result of its second round of three-year loans to banks, which politicians hope will plonk much of the money into government bonds.