The recent meeting between US president Donald Trump and China's president Xi Jinping was highly anticipated, with expectations sky-high of an end to the ongoing trade war.
The event itself at the G20 summit in Osaka last month was something of a damp squib.
Yet the mere intention to re-engage in trade negotiations, and call off further trade hostilities, was enough to push many equity markets around the world to new historical highs.
We would however caution against such rash conclusions.
It's highly likely that stockmarkets had already priced in that the trade conflict would be resolved before the autumn, and simply saw this view confirmed.
On the other hand, what has been driving risk asset valuations higher since the beginning of the year is the prospect of central banks restarting monetary easing through rate cuts and further quantitative easing (QE).
It comes as global economic activity levels have slowed markedly, and as companies have struggled to deliver any substantial profit growth.
This stands in stark contrast to 2018. This was a year characterised by double-digit profit growth, but also central banks’ steady rate rises and quantitative tightening, resulting in the market correction we saw towards the end of last year.
We are now 10 years after the financial crisis forced central banks to engage in extraordinary monetary support measures, and yet capital markets remain more driven by a change of direction in monetary policy than by corporate fortunes.
It's therefore far more likely that the positive start to July markets-wise, that followed a very strong June, was much more driven by the news of who will succeed Mario Draghi as president of the European Central Bank (ECB).
It had been feared that Germany's Jens Weidmann, an opponent of monetary easing, would be appointed to the role. Instead it is head of the International Monetary Fund Christine Lagarde who will take the top job.
Her appointment seems to ensure that the ECB’s hinted restart of QE will outlive Draghi’s presidency, and could once again provide the seemingly vital flow of additional monetary global liquidity that accompanied the 2016/2017 stockmarket rally.
All those who expect the equity market ‘melt-up’ to continue on the back of an anticipated cash injection now need to take a step back. They need to ask themselves just how long investors will be willing to ignore the deteriorating economic fundamentals and rely on monetary 'soothing'.
'An uncomfortable period'
During previous periods of monetary policy success, corporate earnings previously fell steeply and therefore had much headroom to recover.
Credit availability also tightened so much that the central bank reprieve made a considerable difference for businesses.
This time around, neither is the case and it is not obvious who, apart from capital markets, will benefit from the return of an ultra-low cost of finance – while the negative side effects are most likely to return.
We have entered an uncomfortable period during which market valuations have every (monetary) reason to grind higher.
At the same time, there will eventually come a point when investors will be disappointed by the lack of corporate profit growth to underpin higher valuation levels.
Unfortunately there is no good indicator for the length of such a period.
Central banks are now on notice by capital markets to follow through on their hints, or risk an almighty disappointment which would worsen the economic environment towards recession, from what still only amounts to a mid-cycle slowdown.
All this creates an environment where there is a fragile balance between hope and fear.
We have neither banked on a continuation of the ongoing rally, nor cut investment exposure in anticipation of what may be to come.
We are cautiously optimistic that the global economy will, just as before, return from near stagnation back to steady yet slow growth.
This should prevent a rude market awakening, even if this might mean there isn't much further upside to equity market returns on top of the double-digit levels achieved thus far.
In such an environment it is not possible to argue convincingly for going overweight on risk exposure, without risking long-term investor performance in return for short-term kudos for an investment team.