Equity markets have been on a run for the majority of the last five or so years (see Fig 1) and yet, for a lot of investors, there is an impending feeling of doom – that this is all going to end in tears. It is in this vein that I came across a commentary written by Mohamed El Erian, of Pimco fame (or notoriety given his very public spat with Bill Gross), in which he delves into the question of why this bull market is so unloved and so feared.
El Erian asked his regular column readers why they felt so uncomfortable about the current rally and most of the responses were focused on the US Federal Reserve’s (the “Fed”) role in pushing up asset prices – higher than they would be under normal circumstances – with comments such as “changing the law of physics…“, “spinning straw into gold…” and “sprinkling fairy dust…“.
Another reader went on to refer to the Fed as the “800lb gorilla in the room and it looks like they are in no hurry to leave“. Whilst such comments are always subjective, far more interesting to me was the comment “every dip is a buying opportunity“, indicating how conditioned investors have already become to central banks constantly supplying liquidity to the market.
But this is, El Erian felt, also where the anxiety about this bull market comes in – it is both the carrot and the stick. Some were worried that investors are being lulled into “a state of complacency“, that markets are being driven into a “maniac phase“, with relationships between asset classes becoming “unpredictable” and market volatility repressed.
El Erian concluded that readers are most worried about a turn at some time, mainly because there is little faith in the durability and economic soundness of the rebound.
He also concludes that Investors are concerned that bond yields are signalling a Japanese decade of stagnation, not merely believing that rates are low because central banks are the only buyer.
But, even with all this apparent nervousness, the vast majority of El Erian’s readers felt that investors had to stay long of risk, because they were still confident that central banks would continue to support asset prices limiting any and all corrections and thus making them “shallow“. The overriding theme appeared to be that we are still “a world awash with money looking for a home…“.
Personally, I found the readers’ comments to be very incisive of what investors are currently thinking, but it also tells me that when the turn comes (and it will), investors could potentially be in for a nasty shock, as relying on central banks being the single biggest reason to be long of a risk, appears to be dangerous strategy to me. MitonOptimal continue to be long of equities within our portfolios, but also hold protection for the inevitable day when investors wake up to the fact that central banks are not omnipotent.
