Tags: optimism | complaceny | invest | fed

Too Much Market Optimism Causes Too Much Investor Complacency

Monday, 27 April 2015 06:36 AM Current | Bio | Archive

This week, from an investor’s standpoint, Wednesday could become the most interesting day of the week as we’ll get the Federal Open Market Committee (FOMC) statement (there will be no press conference nor any updates to the Fed’s own economic forecasts) as well as the first U.S. Q1 GDP data.

The Fed will probably remain in wait-and-see mode and therefore we should expect very little change to the wording of the FOMC statement also because, probably, we'll have soft growth in Q1 GDP that could come in around the 1.0-1.50 percent zone.

Anyway, in their March statement the FOMC already stated: “… an increase in the federal funds target rate remains unlikely at the April FOMC meeting…” and not very much has changed since then.

Nevertheless, it will be interesting to see if there is any mentioning of the strength of the U.S. dollar, which has started to pop up in recent Fed speeches as a potential challenge to GDP.

Please keep in mind U.S. GDP growth rates from 2010-2014 have been on average: 0.6 percent in Q1; 3.0 percent in Q2; 3.1 percent in Q3 and 2.6 percent in Q4.

So, whatever low Q1 GDP number hits the wires, I don’t think that should be serious reason for panic, but that nevertheless could have some impact on the dollar. Anyway it will be GDP growth during the 2nd quarter that will be key for knowing where the U.S. economy is bound.

I personally still believe whatever comes out from Q1 there remains serious potential for growth in the 3 percent zone y/y for 2015 because, and as we all know, about 70 percent of U.S. GDP is consumption related.

For Q1 U.S. household debt service ratio came in at 9.9 percent, which is its lowest rate since decades, and household net worth (not seasonally adjusted) stood at $83.899, also its highest level ever.

The University of Michigan also gave us its provisional data for which it will release its final April data on Friday but in the meantime that reads: (1) Consumer confidence index for April at 95.9 or +14.0 percent y/y; (2) Current economic conditions at 108.2 or +9.6 percent y/y; (3) Index of consumer expectations at 88.0 or +17.8 percent y/y.

All these data show potential for growth in the U.S. remains well in place.

Please don't take me wrong, I’m not saying all is perfect, but no doubt the U.S. as “big” developed economy remains the envy of many all over the globe.

As an investor, please keep in mind markets in the U.S. as everywhere else don’t reflect at present real economics. The levels in equities in the U.S., Europe, Japan, China, etc. are “actually” or “hoped for in China” liquidity induced, and that situation could easily reverse once U.S. monetary policy starts its long path to normalization.

Yes, markets are playing a big game on thin ice, which could go on for quite some time, and of which literally nobody knows for how long. There is no doubt at some time that thin ice will break, that’s for sure.

In context of the above, the American weekly Barron’s just published its own polling results of what big U.S. money managers think about markets and financial assets and that show 82 percent are bullish and only 18 percent are bearish on U.S. stocks over the next 12 months.

These big money managers are also bullish on European stocks, Japanese stocks, but are slightly bearish on emerging market stocks and 71 percent are convinced equities will deliver the best performance over the next 12 months.

Interestingly they are bearish on literally all forms of bonds, which simply means they expect higher interest rates.

They are also bearish on gold and commodities in general.

To me, the most interesting point of the polls is that big money managers are 46 percent bullish on “cash,” which is unusually high, which, I think, they are convinced a serious "re-pricing" is coming.

Too much optimism causes too much complacency and in serious investing such an attitude never ends well.

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Yes, markets are playing a big game on thin ice, which could go on for quite some time, and of which literally nobody knows for how long. There is no doubt at some time that thin ice will break, that’s for sure.
optimism, complaceny, invest, fed
Monday, 27 April 2015 06:36 AM
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