O’Shaughnessy Asset Management explores how aggressive fiscal policy can flip traditional market logic, creating “upside-down” markets where bad news drives gains and good news can weigh on equities. The paper argues that once policymakers target outcomes like nominal GDP, stimulus can overwhelm fundamentals, with COVID-era spending around 35% of GDP hinting at this shift.
Upside-Down Markets: Profits, Inflation and Equity Valuation in Fiscal Policy Regimes
O’Shaughnessy Asset Management
Jesse Livermore
Research
94 Pages
Key Takeaways
Fiscal Dominance Emerges: Roughly $7.5 trillion in stimulus, about 35% of GDP, shows fiscal policy can override economic weakness and directly drive nominal growth outcomes.
Nominal Growth Targeting: A hypothetical 5% nominal GDP target illustrates how policymakers could offset weak real growth with inflation, stabilizing aggregate income despite underlying economic damage.
Valuation Support Mechanism: Large-scale issuance of near 0% yielding government debt pushes investors into equities, mechanically lifting valuations even during periods of declining fundamentals.
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