Opinion | With market turbulence subsiding into a rolling bear market, are investors being complacent? Not quite

While risks such as Brexit, the trade war and slowdowns in China and the euro zone persist, there are grounds for optimism, such as accommodative policy regimes in the world’s two largest economies

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Investment bank JPMorgan described the current market as “rolling bear market in volatility”. Photo: Patty Bauchman/ The Comedy Wildlife Photography Awards 2018

Published: 2:00pm, 21 Mar 2019Updated: 10:22pm, 21 Mar 2019

On December 24 last year, the benchmark S&P 500 equity index stood at its lowest level since April 2017, having plummeted nearly 20 per cent from its record high on September 21. Yet, by December 31, the index had risen 6.5 per cent and has since climbed a further 12.6 per cent, leaving the S&P 500 just 3.7 per cent shy of its all-time high.

The speed and scale of the shift in sentiment – after suffering their worst December since 1931, US stocks roared back in January, enjoying their best start to the year since 1987 – has taken many investment strategists by surprise, especially since some of the main vulnerabilities in financial markets are still present.

Among the factors responsible for the severe sell-off in the final quarter of last year, the slowdown in the economies of China and the euro zone and the US-China trade war remain major headwinds for the global economy. According to the results of Bank of America Merrill Lynch’s latest fund manager survey, published on Tuesday, the deceleration of China’s economy has supplanted the trade war as the biggest threat to markets. Other risks that persist include the acute uncertainty surrounding Britain’s departure from the European Union and the sharp deterioration in the earnings of publicly listed American companies.

Yet markets appear unfazed. Practically every major asset class has delivered positive returns this year, with stocks in advanced and developing economies – in particular Chinese equities – outperforming the rest of the market. The turbulence that wreaked havoc on investors’ portfolios last year has subsided to such an extent that it has resulted in what JPMorgan, in a report published last Friday, calls a “rolling bear market in volatility”.

Many analysts believe complacency has crept back into markets, setting investors up for disappointment as some of the key hurdles in trade negotiations prove insurmountable and growth in Europe and China fails to pick up. However, while there are plenty of reasons to be bearish, there are also grounds for optimism.

For starters, there has been a significant easing of financial conditions, evidenced by the subdued levels of volatility across asset classes and the sharp fall in the yield on the benchmark 10-year US Treasury bond to its lowest level since January 2018. At the beginning of last year, China’s deleveraging drive was in full swing and the Fed was raising interest rates at a faster pace. Today, Beijing is prioritising growth while America’s central bank has shelved plans for further rate increases. In the space of half a year or so, the policy regimes in the world’s two largest economies have become much more accommodative.