Bull Case vs Bear Case
At the time of writing, the S&P500 has made a huge comeback from its previous low of 2,200 to nearly 2,600. It is now down 25% from ATH.
While headlines mostly associated this rally with monetary and fiscal packages, I continue to suspect that this was largely fueled by rule-based, end-of-quarter rebalancing. Many 60/40 funds, risk parity funds, and ETFs recalibrated their portfolio towards the end of the quarter and bought a ton of equities.
I cannot precisely quantify the impact of this quarterly rebalancing, but in the past, my quantitative strategies tended to perform significantly better on the last couple of days of each quarter than during the rest of the year. That is because price actions tend to be driven by the aforementioned liquidity-driven trades than by fundamentals. In April, however, I think fundamentals will start to dominate.
So where do we go from here?
When it comes to economic impacts, there are many future probability streams. To help you visualize these probability streams, I’ll simplify them into two cases - a bull case and a bear case - and lay out the details below.
It’s a very simplistic approach of course, and even then, unfortunately, I cannot assign a probability to each with high conviction. But I do worry that the market is only pricing in the bull case and the probability of the bear case is significantly different from zero.
