My sense is that investors are exuberant to have a new theme, any theme, other than watching the Federal Reserve.
If you net out all the assets and liabilities in an economy, you’ll find that the nation’s accumulated stock of real investment is the only thing that remains.
Short-term oversold conditions offer a sense of potential knee-jerk dip-buying behavior, but the conviction of that behavior is often fairly weak and short-lived.
My continued impression is that the global equity markets broadly peaked in the second-quarter of 2015, and that the more recent marginal U.S. highs in August were a “throwover” in response to the post-Brexit plunge in global interest rates.
Put simply, it’s not valuation norms that have increased, but instead the willingness of investors to repeatedly chase stocks to valuation levels that remain associated with predictably dismal subsequent outcomes.
Several weeks ago, we shifted from a rather neutral near-term stock market view, to a hard-negative outlook, based on fresh deterioration in various trend-sensitive components within our broad measures of market action.
Historically, the best opportunities to boost market exposure emerge when a material retreat in valuations is joined by an early improvement in market action. At present, exactly the opposite is true. Extreme valuations and compressed risk-premiums have been joined by deterioration in market internals. This deterioration is an indication of growing risk-aversion among investors. Much of the recent bubble has been driven by yield-seeking, trend-sensitive speculators, with value-conscious investors progressively stepping back. As a result, any coordinated attempt by trend-sensitive market participants to exit by selling stock is unlikely to be met by demand from value-conscious investors at prices anywhere near present levels. This, in turn, leaves the market vulnerable to potentially abrupt losses.
Every financial bubble rests on the presumption that there is still some greater fool available to purchase overvalued assets, no matter how overvalued they might become. In the recent half cycle, central banks have intentionally extended this speculation by promising that they, themselves, could be relied upon to be those greater fools.