A 'last hurrah' for the bulls

"Bullish snorts" are getting louder, says Robert Lenzer on Forbes.com. Global stocks have gained 35% since mid-March, and equities' ongoing rise suggests investors are betting that the signs of growth falling more slowly are a prelude to growth rebounding rapidly. According to JP Morgan's latest outlook, "the world economy is bottoming. The recovery is set to be a clean V."

A V-shaped recovery may be good news for the economy. But investors should note that sustainable bull markets don't begin with a V shape, like the pattern seen in stockmarkets in the last four months, says John Authers in the FT. History's worst bear markets usually end with minor falls followed by gradual upswings, buttressed by rising trading volumes. This year's sharp fall has been followed by a strong rally while volumes have actually fallen.

As far as fundamentals go, bulls have forgotten that recessions following financial crises aren't V-shaped. They are deeper and longer than regular business cycle recessions, says the International Monetary Fund. Recoveries tend to be lacklustre as households and businesses work off their debt loads and repair their balance sheets, hampering demand.

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So we could well suffer a renewed downward lurch after stimulus packages wear off. Jeremy Gratham of GMO reckons this sort of pattern is likely, with a relapse after a "superficial recovery" triggered by the stimulus, followed in turn by a protracted period of "sub-normal growth as the basic underlying economic and financial problems are corrected". Call it the "VL", or "very long" recovery.

That suggests this rally is doomed but it needn't end just yet. Stocks have historically been much more sensitive to stimulus than the economy, says Grantham. With the "greatest monetary and fiscal stimulus" in US history being applied, equities could rise all the way to 1,100 on the S&P 500 before the end of the year, as investors anticipate a likely improvement in the economy.

But stocks will fall back as the economy declines again and we face around "seven lean years" with stocks treading water as the economy works off its imbalances. So don't count on a new inflation-adjusted high for the S&P anytime soon. Developed-world stockmarkets face a "long, drawn-out disappointment" and this rally will be the bulls' "last hurrah".