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UBP in der Presse 23.03.2017

The “rational exuberance” of the markets

The “rational exuberance” of the markets

Le Temps - On 5th December 1996, Alan Greenspan introduced the notion of “irrational exuberance” for the first time in a famous speech that shook the markets.


In 2000, Robert Shiller’s book, aptly titled, Irrational Exuberance, contributed to the stock market crash that saw the S&P 500 lose close to 50% of its value following excessive valuations linked to the technology bubble that formed at the end of the 1990s.

Since the start of 2017, we have seen a sort of “nirvana” on the markets, with over twenty successive record highs on the major US indexes, the lowest levels of volatility on the majority of asset classes, and a fall in bonds that, surprisingly, has not had any impact on other asset classes.

A climate of blind euphoria

This generalised optimism and absence of volatility is leading some investors to hope that this time, the markets’ exuberance is rational and therefore sustainable. But, beyond hope, is this environment of blind euphoria not a precursor to the next correction?

Since the election of Donald Trump, the prevailing sense of scepticism has given way to a wave of enthusiasm that is sweeping aside any fears. The publication of company results that were for once above analysts’ expectations, the continued European growth recovery and the effects of Brexit on the UK economy, which are so far very limited, have also fed the exceptional rise in stock market indexes in both the US and Europe.

Over the last twelve months, this rebound has exceeded 20% for most stock markets around the world. Several records have been broken and a number of indexes recently moved out of their fluctuation ranges, which is being interpreted by a majority of technical analysts as a new step on the path to highs well above current levels. Some are even claiming that higher interest rates following the multiple Fed hikes expected in 2017, record valuations for US-listed companies, and sustainably low volatility could become the norm in the long term, feeding “rational bubble”.

The new normal

Analysis of the fundamentals should dampen this blissful optimism. Even though Trump’s programme has given new life to the notion of reflation, which has supported the general sense of enthusiasm, the political calendar, with the lack of economic visibility that it implies, is hanging like a sword of Damocles which cannot be ignored by anyone.

The outcomes of the upcoming elections in the major European countries are also highly uncertain and could endanger the foundations of the EU. Brexit will get under way in 2017 and reveal its real consequences only gradually. The positive impact of reflation in the United States should not be felt for several quarters either.

Major break

Last, and most important, the winding up of asset-purchase programmes by central banks (if this happens as announced) will mark a major shift, with the end of the implicit guarantee provided by these purchases over the past five years potentially penalising equity and bond markets.

It is always risky to try and predict how long speculative bubbles will last or when they will burst; and this has in fact been the main subject of study of many a Nobel Prize-winner in recent years. The late 1990s bubble must serve as a cautionary tale: Alan Greenspan’s speech in 1996 came some four years before the dotcom bubble burst. Investors who interpreted these remarks as a sign to pull out of equity markets sold when the Dow Jones was around 6,500 points, yet the index continued to rise until January 2000, reaching close to 12,000. This highlights the difficulty in pinpointing the moment to sell even when worrying factors are building up.

Capturing and preserving

Portfolio managers like us have a duty to capture these recovery phases which contribute significantly to markets’ historical performances, especially in the case of equity markets. However, even in these good times, capital preservation must remain the key objective for long-term asset management, pushing us to protect our investments against a potential wave of corrections that could wipe out our gains.

Today, the main certainties are these: equity valuations in the United States are reaching levels that can only herald accelerated growth for the next few years, and the upcoming elections in Europe will spark a sharp resurgence in volatility in the coming months. The combination of these two factors does not, however, signify that a correction is imminent, and any rash decisions would raise the risk of missing part of the current upturn.

A risky choice

However, investors’ gut reaction to volatility’s return must not be underestimated. We are in a classic phase of market euphoria, where investors are mesmerised by their belief in a paradigm shift and refuse to see the many warning signs. For investment portfolios, this could lead to excessive exposure to risk – a pitfall that active asset managers must avoid.

Analysing stock-market cycles and understanding speculative bubbles lies at the heart of recent economic and financial research. Avoiding massive corrections is certainly the Holy Grail for every active asset manager and is the primary expectation of both private and institutional clients. The current market euphoria as well as the performances seen in recent months, both in equities and in interest rate instruments, require us to protect our positions, and betting on rational exuberance looks like a risky choice.


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Michel Longhini
CEO Private Banking

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Meistgelesene News

Market insight 16.02.2018

US consumer confidence surprised to the upside, UK retail sales broadly flat

US: Consumer confidence (Michigan) (Feb P): 99.9 vs 95.5 expected (prior: 95.7)

  • Current conditions: 115.1 vs 111.1 expected (prior: 110.5)
  • Expectations: 90.2 vs 87.2 expected (prior: 86.3)
  • The press release states that negative references to stock prices were spontaneously cited by just 6% of all consumers. Instead, favorable perceptions of the tax reforms dominated.
  • All in all, consumers still appear to be in strong shape to boost their spending again over the coming months.

 

US: Import price index (Jan): 1% m/m vs 0.6% expected (prior: 0.2% revised from 0.1%)

  • On a y/y basis: 3.6% vs 3% expected (prior: 3% revised from 3.2%)
  • Headline was driven by a surge in imported petroleum prices (+4.3% m/m).
  • Within non-petroleum imported prices, the bulk of the increase came from industrial supplies (+3.1% m/m), while prices of capital goods and autos recorded only modest growth.

 

US: Housing starts (Jan): 1326k vs 1234k expected (prior: 1209k revised from 1192k)

  • On a y/y basis: 9.7% vs 3.5% expected (prior: -8.2% revised from -6.9%)
  • Building permits: 1396k vs 1300k expected (prior: 1302k revised from 1300k); 7.4% m/m vs 0% expected (prior: -0.1% revised from -0.2%)
  • While the volatile multi-family category led the increase, single-family starts rose as well.

 

UK: Retail sales (Jan): 0.1% m/m vs 0.5% expected (prior: -1.4% revised from -1.5%)

  • On a y/y basis: 1.6% vs 2.5% expected (prior: 1.4% revised from 1.5%)
  • Ex autos: 0.1% vs 0.6% expected (prior: -1.6% revised from -1.5%); 1.5% y/y vs 2.4% expected (prior: 1.3%)
  • Retail sales growth was broadly flat at the beginning of the New Year with the longer-term picture showing a continued slowdown in the sector.
Market insight 15.02.2018

Rising core PPI and disappointing industrial production in the US

US: PPI (Jan.): 0.4% m/m as expected (prior: 0.0% revised from -0.1%)

  • PPI y/y: 2.7% vs 2.4% expected (prior: 2.6%)
  • Core PPI: 0.4% m/m vs 0.2% expected (prior: -0.1%); 2.2% y/y vs 2.0% expected (prior: 2.3%)
  • The annual increase in core PPI is close to a 6-year high, which partly reflects the upward pressure on import prices from the weaker dollar and provides further evidence that inflationary pressures are set to build this year.

US: Industrial production (Jan.): -0.1% m/m vs 0.2% expected (prior: 0.4% revised from 0.9%)

  • Manufacturing production was flat m/m (vs 0.3% expected) and previous readings were revised slightly lower.
  • Except the 0.6% m/m rise in utilities output, which was due to the unseasonably cold temperatures in some regions, the weakness in January was broad-based.
  • Along with the weaker retail sales data released yesterday, this report provides further evidence that economic growth may (yet again) disappoint in Q1.

US: Philadelphia Fed. (Feb.): 25.8 vs 21.8 expected (prior: 22.2)

  • Unexpected increase with a solid rise in new orders, in employment but also in prices paid.

US: Empire manufacturing (Feb.): 13.1 vs 18.0 expected (prior: 17.7)

  • New orders slightly increased while employment and prices paid rose more meaningfully.
  • These two regional surveys confirms that manufacturers continue to be optimistic for the economic activity.

US: Initial jobless claims (Feb. 10): 230k vs 228k expected (prior: 223k revised from 221k)

US: NAHB housing market index (Feb.): 72 as expected (prior: 72)

  • Homebuilders' confidence remains close to the highest level since 1999.
  • The measure on the 6-month outlook reached its highest since 2005.

Russia: Industrial production (Jan.): 2.9% y/y vs -0.5% expected (prior: -1.5%)

 

Market insight 14.02.2018

US: higher inflation and lower retail sales than expected

US: CPI (Jan.): 0.5% m/m vs 0.3% expected (prior: 0.2% revised from 0.1%)

  • Yearly trend on headline inflation was stable at 2.1% y/y; core inflation was up by 0.3% m/m (vs 0.2% m/m expected and in prior month; stable at 1.8% y/y).
  • Energy (3% m/m), apparels (1.7% m/m; related to import prices) and services (0.3% m/m) were responsible for the monthly rebound.
  • Outlook on inflation points towards a rising trend; after moderate yearly trend in Q1, headline inflation should be close to 3% y/y in Q2, and core CPI above 2% y/y according to our scenario. 2018 average headline inflation should now reach 2.5% y/y and core inflation 2.2% y/y.
  • This argues in favor of regular rate hikes from the Fed in Q1 and Q2-18, and in favor of 4 rate hikes this year.

 

US: Retail sales (Jan.): -0.3% m/m vs 0.2% expected (prior: 0% revised from 0.4%)

  • Core sales were flat (0.4% m/m expected) and past month data were revised from 0.4% m/m to 0% m/m.
  • Bad weather conditions and a pause after strong Q4 data partly explained the negative surprises on sales.
  • Purchases on several items have reversed from the past two months (autos, building materials and electronics); non-store sales were flat after 0.5% m/m.
  • Too early to see in these volatile data a reversal in US scenario, as supports should continue from the heathy labor and some fiscal easing.

 

US: Business inventories (Dec.): 0.4% m/m vs 0.3% expected (prior: 0.4%)

  • Inventories have increased (notably ex-autos); but sales were still dynamic (0.6% m/m).

 

Eurozone: Industrial production (Dec.): 0.4% m/m vs 0.1% expected (prior: 1.3% revised from 1%)

  • Except capital goods, momentum in production was positive for all major sectors.
  • Yearly trend has reached 5.2% y/y, comparable to the high pace in activity reached before the crisis.

 

Germany: GDP (Q4-17): 0.6% q/q as expected (prior: 0.8%)

  • Growth has been strong at year end; Eurozone GDP has also been confirmed up by 0.6% q/q in Q4-17.

 

Germany: CPI (Jan.): -1% m/m as expected (prior: 0.6%)

  • Rising oil and food prices, while prices for leisure and clothes have weakened.
  • Yearly trend has moderated from 1.6% y/y to 1.4% y/y.

 

Italy: GDP (Q4-17): 0.3% q/q as expected (prior: 0.4%)

  • GDP was up by 1.6% y/y (1.7% y/y in Q3-17); Italy is under a progressive recovery, but it remains fragile.

 

Poland: GDP (Q4-17): 1% q/q vs 1.2% expected (prior: 1.2%)

  • Activity was on an accelerating trend (5.1% y/y after 4.9% y/y in Q3-17).

 

Turkey: Current account (Dec.): -7.7bn USD vs -7.5bn expected (prior: -4.38bn revised from -4.2bn)

  • Rising imports and weaker exports have increased trade and current account deficits.

Auch lesenswert

Market insight 16.02.2018

US consumer confidence surprised to the upside, UK retail sales broadly flat

US: Consumer confidence (Michigan) (Feb P): 99.9 vs 95.5 expected (prior: 95.7)

  • Current conditions: 115.1 vs 111.1 expected (prior: 110.5)
  • Expectations: 90.2 vs 87.2 expected (prior: 86.3)
  • The press release states that negative references to stock prices were spontaneously cited by just 6% of all consumers. Instead, favorable perceptions of the tax reforms dominated.
  • All in all, consumers still appear to be in strong shape to boost their spending again over the coming months.

 

US: Import price index (Jan): 1% m/m vs 0.6% expected (prior: 0.2% revised from 0.1%)

  • On a y/y basis: 3.6% vs 3% expected (prior: 3% revised from 3.2%)
  • Headline was driven by a surge in imported petroleum prices (+4.3% m/m).
  • Within non-petroleum imported prices, the bulk of the increase came from industrial supplies (+3.1% m/m), while prices of capital goods and autos recorded only modest growth.

 

US: Housing starts (Jan): 1326k vs 1234k expected (prior: 1209k revised from 1192k)

  • On a y/y basis: 9.7% vs 3.5% expected (prior: -8.2% revised from -6.9%)
  • Building permits: 1396k vs 1300k expected (prior: 1302k revised from 1300k); 7.4% m/m vs 0% expected (prior: -0.1% revised from -0.2%)
  • While the volatile multi-family category led the increase, single-family starts rose as well.

 

UK: Retail sales (Jan): 0.1% m/m vs 0.5% expected (prior: -1.4% revised from -1.5%)

  • On a y/y basis: 1.6% vs 2.5% expected (prior: 1.4% revised from 1.5%)
  • Ex autos: 0.1% vs 0.6% expected (prior: -1.6% revised from -1.5%); 1.5% y/y vs 2.4% expected (prior: 1.3%)
  • Retail sales growth was broadly flat at the beginning of the New Year with the longer-term picture showing a continued slowdown in the sector.
Market insight 15.02.2018

Rising core PPI and disappointing industrial production in the US

US: PPI (Jan.): 0.4% m/m as expected (prior: 0.0% revised from -0.1%)

  • PPI y/y: 2.7% vs 2.4% expected (prior: 2.6%)
  • Core PPI: 0.4% m/m vs 0.2% expected (prior: -0.1%); 2.2% y/y vs 2.0% expected (prior: 2.3%)
  • The annual increase in core PPI is close to a 6-year high, which partly reflects the upward pressure on import prices from the weaker dollar and provides further evidence that inflationary pressures are set to build this year.

US: Industrial production (Jan.): -0.1% m/m vs 0.2% expected (prior: 0.4% revised from 0.9%)

  • Manufacturing production was flat m/m (vs 0.3% expected) and previous readings were revised slightly lower.
  • Except the 0.6% m/m rise in utilities output, which was due to the unseasonably cold temperatures in some regions, the weakness in January was broad-based.
  • Along with the weaker retail sales data released yesterday, this report provides further evidence that economic growth may (yet again) disappoint in Q1.

US: Philadelphia Fed. (Feb.): 25.8 vs 21.8 expected (prior: 22.2)

  • Unexpected increase with a solid rise in new orders, in employment but also in prices paid.

US: Empire manufacturing (Feb.): 13.1 vs 18.0 expected (prior: 17.7)

  • New orders slightly increased while employment and prices paid rose more meaningfully.
  • These two regional surveys confirms that manufacturers continue to be optimistic for the economic activity.

US: Initial jobless claims (Feb. 10): 230k vs 228k expected (prior: 223k revised from 221k)

US: NAHB housing market index (Feb.): 72 as expected (prior: 72)

  • Homebuilders' confidence remains close to the highest level since 1999.
  • The measure on the 6-month outlook reached its highest since 2005.

Russia: Industrial production (Jan.): 2.9% y/y vs -0.5% expected (prior: -1.5%)

 

Market insight 14.02.2018

US: higher inflation and lower retail sales than expected

US: CPI (Jan.): 0.5% m/m vs 0.3% expected (prior: 0.2% revised from 0.1%)

  • Yearly trend on headline inflation was stable at 2.1% y/y; core inflation was up by 0.3% m/m (vs 0.2% m/m expected and in prior month; stable at 1.8% y/y).
  • Energy (3% m/m), apparels (1.7% m/m; related to import prices) and services (0.3% m/m) were responsible for the monthly rebound.
  • Outlook on inflation points towards a rising trend; after moderate yearly trend in Q1, headline inflation should be close to 3% y/y in Q2, and core CPI above 2% y/y according to our scenario. 2018 average headline inflation should now reach 2.5% y/y and core inflation 2.2% y/y.
  • This argues in favor of regular rate hikes from the Fed in Q1 and Q2-18, and in favor of 4 rate hikes this year.

 

US: Retail sales (Jan.): -0.3% m/m vs 0.2% expected (prior: 0% revised from 0.4%)

  • Core sales were flat (0.4% m/m expected) and past month data were revised from 0.4% m/m to 0% m/m.
  • Bad weather conditions and a pause after strong Q4 data partly explained the negative surprises on sales.
  • Purchases on several items have reversed from the past two months (autos, building materials and electronics); non-store sales were flat after 0.5% m/m.
  • Too early to see in these volatile data a reversal in US scenario, as supports should continue from the heathy labor and some fiscal easing.

 

US: Business inventories (Dec.): 0.4% m/m vs 0.3% expected (prior: 0.4%)

  • Inventories have increased (notably ex-autos); but sales were still dynamic (0.6% m/m).

 

Eurozone: Industrial production (Dec.): 0.4% m/m vs 0.1% expected (prior: 1.3% revised from 1%)

  • Except capital goods, momentum in production was positive for all major sectors.
  • Yearly trend has reached 5.2% y/y, comparable to the high pace in activity reached before the crisis.

 

Germany: GDP (Q4-17): 0.6% q/q as expected (prior: 0.8%)

  • Growth has been strong at year end; Eurozone GDP has also been confirmed up by 0.6% q/q in Q4-17.

 

Germany: CPI (Jan.): -1% m/m as expected (prior: 0.6%)

  • Rising oil and food prices, while prices for leisure and clothes have weakened.
  • Yearly trend has moderated from 1.6% y/y to 1.4% y/y.

 

Italy: GDP (Q4-17): 0.3% q/q as expected (prior: 0.4%)

  • GDP was up by 1.6% y/y (1.7% y/y in Q3-17); Italy is under a progressive recovery, but it remains fragile.

 

Poland: GDP (Q4-17): 1% q/q vs 1.2% expected (prior: 1.2%)

  • Activity was on an accelerating trend (5.1% y/y after 4.9% y/y in Q3-17).

 

Turkey: Current account (Dec.): -7.7bn USD vs -7.5bn expected (prior: -4.38bn revised from -4.2bn)

  • Rising imports and weaker exports have increased trade and current account deficits.