Markets show a worrying lack of concern over Delta variant and other risks to growth
- It is increasingly apparent that most investors are no longer concerned about threats to the global economy and markets
- They seem just as indifferent to virus-induced threats to growth as they are about growth-induced threats to financial stability
As the second half of the year gets under way, sentiment in financial markets remains resolutely bullish. The benchmark S&P 500 equity index gained 14.4 per cent in the first half of this year, its second-best performance since 1998, according to data from Bloomberg.
Global stocks, meanwhile, stand at a record high. Spreads on junk-rated corporate bonds in the United States have fallen to their lowest level since before the 2008 financial crisis.
Yet, the statistics do not tell the whole story. In the past few months, it has become increasingly apparent that most investors have stopped worrying about threats to the global economy and markets.
To be sure, the remarkable progress in deploying vaccines in advanced economies has been a major factor pushing markets higher.
What is more, markets continue to be supported by unprecedented amounts of monetary and fiscal stimulus, reducing investors’ sensitivity to risks and vulnerabilities.
In Bank of America’s latest fund manager survey, published on June 15, a net 18 per cent of respondents said they were taking on more risk than usual, close to the highest percentage since the survey began.
The speed at which fears about inflation receded is particularly troubling. While there are good reasons to treat the current spike in prices as a temporary, reopening-induced surge, the risk that it has a longer-lasting impact is significant and should not be dismissed lightly.
Furthermore, judging by the record high levels at which stocks are trading and the collapse in US corporate bond spreads, one would think the pandemic ceased to be a danger some time ago.
Some countries, notably Indonesia and Thailand, are suffering their worst outbreaks, keeping restrictions in place and exacerbating global economic divergences.
However, the most important reason to guard against complacency is the dangerous combination of lofty valuations, particularly in the US, and the challenges facing governments and central banks in normalising policy, aptly called “Pandexit” by the Bank for International Settlements in its annual economic report published on Tuesday.
The uncertainty over the conditions and timing of the removal of policy accommodation by the Fed is far and away the biggest test for asset prices, with elevated valuations raising the stakes further.
There is nothing new about complacency in markets. What is remarkable is that investors are just as unconcerned about virus-induced threats to growth as they are about growth-induced threats to financial stability. Despite the pervasive bullishness on Wall Street, caution is entirely warranted.
Nicholas Spiro is a partner at Lauressa Advisory