Why the biggest threat to the stock market rally is the one that no one is talking about
- Lacklustre global growth, continued US-China sparring and geopolitical risks over Iran are all potential triggers for a major sell-off, but none appear likely to materialise
- Instead, the danger may come from vulnerabilities yet to be identified. History shows a ‘black swan’ event is not so unthinkable
Call it the Teflon market. The list of potential triggers for a major sell-off continues to grow, yet none of the most frequently cited ones appear menacing enough to cause investor sentiment to deteriorate sharply.
Last year, global equity and bond markets enjoyed their strongest and broadest gains since 2010, according to data from JPMorgan. The benchmark S&P 500 index surged nearly 30 per cent, the yield on 10-year US Treasury bonds plunged 80 basis points, while spreads on US corporate bonds narrowed sharply.
Indeed, as JPMorgan noted in a research report published last Friday, global markets are now “generating early signs of excess as measured by cross-asset price momentum, positioning and valuations”.
However, these frothy conditions, while increasing the scope for a disorderly sell-off, only pose a serious threat if there is a high degree of conviction among investors and financial commentators about the catalyst for a sharp fall in asset prices.
Right now, the most likely “spoilers” are not disruptive enough to put markets under severe strain.