- The consensus has been consistently wrong since July. Global economic activity recovered faster than expected. Not only are data releases better than expected, past data has been positively revised as well. Three factors seem to be surprising the markets:
- Markets always underestimate the ability of humans to adapt in the face of a crisis. People do not want to give up their hard-won living standards. People do adapt—working from home and shopping online to maintain some semblance of their pre-pandemic lifestyle.
- It is clear that 2020 was not a “recession” in the way most people understand the term. For several sectors ending lockdown was like turning on a light switch—the bounce back was immediate, not the usual gradual grind higher. Too many forecasts have tried to squeeze the 2020 economic experience into the unsuitable format of a conventional economic cycle. That caused too much pessimism.
- People are be biased by news flow. Negative news around the pandemic creates a negative sentiment. Notice that business sentiment measures (which correlate strongly with news stories) have tended to get economic reality wrong—pointing to fourth-quarter contractions in Spain and Germany, when the economies expanded, for instance.
- While the pandemic is obviously a serious economic shock, investors should guard against excessive economic pessimism.