Overheating, euphoria and low volatility a precursor to change
Consensus is for strong global GDP growth, but there are risks to short-term performance
Markets have made a strong start to the year. The S&P 500 has risen more than 4% in the year to date, with the Hong Kong Hang Seng index up close to 5%. This strong performance comes on the heels of a 6.1% increase in the S&P 500 last quarter. While our overall equity market view is constructive, we doubt that the pace of gains can be sustained in the near term. Markets are becoming overheated and are beginning to exhibit signs of euphoria. The equity markets risk-reward profile is deteriorating. Data on sentiment from the American Association of Individual Investors (as at January 3) showed 59.8% of individual US investors were bullish on markets on a six-month view — the highest reading since December 2004. Only 15.6% held a bearish view — the lowest reading since June 2003. On a net basis, the sentiment indicator is at its most bullish since December 2010. Extreme levels of investor sentiment are often a precursor to a market turning point. The previous two highest readings of th...
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