HomeThe Biggest Consensus in History

The Biggest Consensus in History

With most market participants out for the end of the year holidays, the focus shifts to what will the next year bring? Surely, 2020 surprised everyone. 

If at the start of the trading year someone would have told you that a pandemic will grip the world’s biggest economies and yet the stock markets in developed countries will make new all-time highs, the chances are you would not have believed such a scenario. And yet it happened.

How about 2021? Can we have a similar surprise?

Judging by the chart below, the overwhelming opinion is that the equities will keep rising. If correlations hold, the U.S. dollar should decline.

What are the risks to such a consensus?

Change in the U.S. Administration

Trump’s administration never thought that it could not have a second term. During his presidency, Trump made no secret that he favours a lower USD. In fact, he explicitly criticized the Fed for its tightening policy when all the other central banks in the developed world were easing (e.g., ECB, RBA). He constantly complained on Twitter that the dollar is too strong, and the Fed applies the wrong policy.

Things abruptly changed in March 2020. As the pandemic spread, the stock market reacted, and the Fed had to ease even more than during the 2008 – 2009 Great Financial Crisis.

Now that Trump prepares to leave the White House, the Biden transition team nominated Janet Yellen as the new head of the U.S. Treasury. Those familiar with the years when Yellen was at the head of the Fed remember that she was favouring a ‘strong USD’ policy.

Can this be the risk in 2021 that could spell trouble for the USD bears? Can stocks still rise with a stronger dollar? The answer is yes to both questions.

One thing is for sure – it would not be the first time (nor the last time) when the market’s reality differs from the consensus. Only this time, if the two differ, so many market participants would be caught off guard that the market’s reaction may take everyone by surprise.

Stronger USD and higher equities are not a new thing. Just think of where the Dow Jones was before Trump’s election in 2016 and how the USD has performed since then. In short, the stock market index rose, while the dollar appreciated across the board until March 2020.

With such precedents in place, do the contrarians have a chance against the biggest consensus in history?

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