“What exactly were investors celebrating?” asks Alan Abelson in Barron’s. Over the last couple of weeks, the Dow soared to a new nominal high and the S&P500 and Nasdaq also gained strongly. And many other equity markets around the globe have been towed along in the US’s wake, with the FTSE 100 finally breaking back above that troublesome 6,000 level. Yet it’s hard to see any fundamental trigger to justify the market taking off in such style.
One factor for the rally may have been “a hardening consensus that the US economy is facing a ‘soft landing’ rather than a hard one”, says Richard Beales in the FT. “With the fillip of lower energy prices, the sharp slowdown in residential property is now widely expected not to hurt consumers enough to trigger a recession.” Essentially, investors are betting that we are heading for “a perfect Goldilocks slowdown: not too hot, not too cold”, says Bill Jamieson in Scotland on Sunday. In this scenario, corporate earnings will hold up well, but the falling oil price will ease inflation fears, and thus the US Federal Reserve will still be able to cut rates early next year. It’s a beguiling picture, but there’s a real risk that the outcome may not be that benign. “When an economy decelerates, there will normally be a period in which it looks as if it is achieving a soft landing”, but this apparent let-off is often a false dawn. Once you factor in the huge amounts of debt that hangs over the US and UK economies, “I cannot help but feel that the Goldilocks theory of slowdown without pain may be
wishful thinking”.
Investors might also be too complacent about the political threats, says
John Authers in the FT. Consider recent upsets in emerging markets, such as Hungary and Thailand. These incidents were largely ignored by the investment community, which should generate its own alarm. “The insouciant reaction suggests that investors just do not care about political risk and that is worrying.” The barely perceptible reaction to North Korea’s test of a nuclear bomb also suggests that, for many investors, only the positives are getting through.
In short, “this is unmistakably a caveat emptor market”, says Abelson. It’s “one of those markets… that has discounted everything but the bad news”.