The sleepy market raises concerns about growing complacency

After concerns about inflation shocked investors in the first few months of 2021, the market has transformed into a different pattern: deep sleep.

Vix, a measure of the expected volatility of the Wall Street S&P 500 Index, fell to a pandemic low of 15.7 points on Friday, and it soared above 80 at the beginning of the pandemic. Last week, Deutsche Bank’s indicator to measure the volatility of the foreign exchange market also fell to its lowest point since February 2020.

Analysts said that the quiet period reflects the Fed’s wait-and-see strategy to a certain extent. The Fed is prepared to survive an unusually high inflation period without abolishing monetary support, and the withdrawal of currency support may disrupt the market. But some investors are increasingly worried that complacency is spreading.

Gergely Majoros, a member of the European Fund Manager Carmignac Investment Committee, said, “We are becoming more and more alert to the calm state of the stock market.” “It means you need to keep your eyes open about what happens next.”

In a research report, the investment committee of the Swiss bank Credit Suisse also warned that “investor complacency is high” in the entire asset market, implying that “the downside risk of the news flow is higher than usual.”

As the economies of developed countries recover from the coronavirus emergency, global stock markets have hit record highs, boosting corporate earnings prospects. But gains have weakened in recent weeks, and some investors say that the good news has already spread. So far this month, the FTSE Global Index measures the gains of developed and emerging market stocks by slightly more than 1.4%.

In the 12 months ending in May, the overall US consumer price inflation rate reached 5%. 4.2% Prices rose in April due to economic reopening and supply chain bottlenecks (such as used cars and commodities) Soar.

Central banks have traditionally tightened financial conditions to counter rising prices. But the Federal Reserve meeting this week has always believed that the burst of inflation is temporary. It has also successfully convinced many investors.

“The market agrees, at least for now, [Fed chair Jay] Powell said that the inflation we are seeing is short-lived,” said Margaret Vitrano, a portfolio manager at ClearBridge Investments.

According to a survey conducted by Bank of America this week of 207 global fund managers responsible for $645 billion in client assets, seven out of ten people believe that post-pandemic inflation will be temporary. Many people have also reduced their bond holdings in anticipation that the Fed’s future support for the market will decrease, thereby reducing the share of bonds in their portfolios to a three-year low. Investors said the negative stance on bonds is another factor persuading asset management companies to hold stocks.

Caroline Simmons, UK Chief Investment Officer of UBS Wealth Management, said: “The stock market should still rise this year, but it will not rise at the same rate it had when activity accelerated earlier this year.”

Historical data shows that low volatility is not always a signal to sell stocks. According to data compiled by Schroder analyst Duncan Lamont, since 1991, buying the S&P 500 on a day when the volatility index is between 15 and 16 will result in a total of the next 12 months. The rate of return was 14.6%.

But analysts said that the calm sentiment in the market suggests that if inflation exceeds the Fed’s expectations, this complacency may be dashed.

“If continued inflation means higher input costs that companies cannot pass on… Because household food and energy costs are also higher, this does affect profitability,” ClearBridge’s Vitrano said. She said that the stock market is “treading the water” “because it is too early to make a conclusion.”

The money market has also been paralyzed by the Fed maintaining the financial environment for a longer period of time than the prospects initially expected by traders.

The U.S. dollar index, which measures the strength of the U.S. dollar against the currencies of trading partners, is up less than 1% this year after taking back most of its gains after a strong first quarter.

“The main narrative of inertia [currencies] Paul Meggyesi, head of global foreign exchange strategy at JPMorgan Chase, said: “It is very simple and emphasizes the confrontation between the irresistible force of U.S. reinflation and the unshakable goal of the super patient Fed.”

The Conference Committee predicts that US economic output will grow at an annualized growth rate of 9% in the second quarter of this year and will slow down thereafter. The company’s earnings are expected to follow a similar trajectory.

According to FactSet data, analysts predict that the earnings of companies listed on the Standard & Poor’s 500 Index this year will increase by 35% in total, and will fall to 12% by 2022. The profit of the Stoxx Europe 600 Index is expected to increase by 51% this year and 14% in 2022.

Unigestion cross-asset investment manager Olivier Marciot said, “The only direction the Fed and other central banks can take now is to reduce easing, which may lead to a correlation shock,” driven by rising bond yields. “The market is in a wait-and-see state. The important thing is not what will happen next, but when it will happen… If you act prematurely in the game, you will be defeated.”