High time for global investors to start connecting the dots
Last Friday, the benchmark S&P 500 equity index rose above the 2,500 mark for the first time ever as international investors downplayed North Korea’s latest missile test and mounting concerns about stretched valuations in stock and bond markets.
The rally in the S&P 500, which has surged nearly 270 per cent since its low in March 2009, is now the second-strongest bull run in the history of US equity markets.
There are plenty of other indications that sentiment continues to remain buoyant. The Vix index, Wall Street’s so-called fear gauge which measures the anticipated volatility in the S&P 500, currently stands just a whisker above its lowest level in two decades. The 10-year US Treasury yield, meanwhile, is 25 basis points lower than where it stood at the start of this year while the dollar index – a gauge of the greenback’s performance against a basket of its peers – has plunged 11 per cent, leading to a sharp easing in financial conditions as I explained in an earlier column.
Yet for every sign that markets remain resilient, there is an indication that sentiment is becoming more fragile. If investors bothered to connect all the dots of fragility, the mood music in markets would be noticeably less cheerful.
The current calm in markets belies growing anxiety that investors may be misreading central banks’ policy signals or, more worryingly, that central banks themselves may be underestimating the dangers of withdrawing stimulus.