Investors appear sanguine given slowing China and likely rate rise
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y any measure, this has been some bull market for US stocks.
Nothing illustrates this better than the fact that 46 months have elapsed since the S&P 500 experienced a typical drop of 10 per cent from a recent high. This type of correction, rather like the ebb and flow of a tidal pattern, represents a normal functioning market, a feature that has been distinctly lacking in recent years.
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y any measure, this has been some bull market for US stocks.
Nothing illustrates this better than the fact that 46 months have elapsed since the S&P 500 experienced a typical drop of 10 per cent from a recent high. This type of correction, rather like the ebb and flow of a tidal pattern, represents a normal functioning market, a feature that has been distinctly lacking in recent years.
High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. See our Ts&Cs and Copyright Policy for more detail. Email ftsales.support@ft.com to buy additional rights. http://www.ft.com/cms/s/0/c3bdda4c-4652-11e5-b3b2-1672f710807b.html#ixzz3jLWT5FCl
y any measure, this has been some bull market for US stocks.
Nothing illustrates this better than the fact that 46 months have elapsed since the S&P 500 experienced a typical drop of 10 per cent from a recent high. This type of correction, rather like the ebb and flow of a tidal pattern, represents a normal functioning market, a feature that has been distinctly lacking in recent years.
High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. See our Ts&Cs and Copyright Policy for more detail. Email ftsales.support@ft.com to buy additional rights. http://www.ft.com/cms/s/0/c3bdda4c-4652-11e5-b3b2-1672f710807b.html#ixzz3jLWfu1Gu
Analysts at Bank of America Merrill Lynch recently highlighted how investment-grade bond yields and equity volatility, key measures of investor sentiment in both these markets, have moved further apart than at any time since March 2008, before the financial crisis erupted.
BAML analysts make the point that US high-grade debt has experienced “a broad-based significant widening of credit spreads”, and not just based on weakening commodity prices, but also reflective of tighter Fed policy and hefty debt sales from the M&A boom. Notably, the pressure on credit spreads began in April, well before oil prices experienced their renewed drop in July.
Equity investors may downplay a credit warning sign in the near term, and therein resides one of the more troubling aspects of the current share market: the high degree of complacency.
Implied volatility remains well contained and not since last October has the Vix stayed above a reading of 20 for five straight days. A quiescent Vix reflects a degree of confidence among investors that the Fed has their back, so to speak. A slow and modest series of rate hikes is unlikely to spoil the bull run, goes the argument of some investors.
“History tells us investors should dump stocks on the last rate hike, not the first,” says JPMorgan Asset Management. “As a result we remain modestly overweight stocks, and with a clear ‘buy the dip’ mentality.”
A compelling feature of the current bull run has been the reward for some investors in selling spikes in volatility, hence the absence of a major correction for nearly four years. Some, however, are worried when they compare investor complacency with elevated equity valuations.
James Paulsen, chief investment strategist at Wells Capital Management, argues that “valuation and sentiment have seldom simultaneously been higher than they are today”.
While investors may look at share valuations being only modestly above average, he cautions “what may be under-appreciated, is how high valuations are at a time when investor sentiment is also complacent”.
Crowding into high-quality and defensive US stocks as we are seeing this month also smacks of the last man standing argument. With other global markets under pressure, and a deflationary wind blowing from China and other emerging market economies, not even the S&P 500 can escape being reacquainted with a hefty correction.
The bigger question for investors is whether such a pullback will rank as a buying opportunity or signals the beginning of the end of the market’s long bull run.
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