Socrates said that happiness is unrepented pleasure. So let’s relish January 2018: rarely in the history of financial markets has a year got off to such a good start and with such good visibility.
"This momentum and contagious sense of optimism continues the remarkable performances of the previous year."
Even better, it is being encouraged by the convergence of positive forecasts that are so incredible that it seems as if no cloud could darken the horizon. The doom merchants, who in 2017 predicted a correction, have been proved wrong, and the investors who missed the boat are kicking themselves, while the bull market still seems to have the wind at its back.
In the United States, where equities are entering their ninth year of growth, the Dow Jones gained 25% last year, while for the first time since it was created in 1957, the S&P 500 chalked up a rise in every month of the year, notching up a total increase of close to 20%. Reflecting an unrestricted confidence, the VIX volatility indicator only just breached an average of 11 in 2017 – its lowest level in a quarter of a century. The rest of the world took part in this year that was even more exceptional given that it took place against a backdrop of a highly stable bond market. The Hong Kong stock exchange leapt 35%, Tokyo surprised observers with a rise of 19%, while Europe put in its best performances since 2013 and the MSCI Emerging Markets rocketed by 34%.
Rare degree of unanimity
So what could cast a shadow across this idyllic scene? Almost nothing, if you believe the majority of strategists, whose forecasts are showing a rare degree of unanimity.
For the real economy, the outlook is set fair and the big comeback of the “Goldilocks Economy” has even been proclaimed in the United States. This fairytale economy is characterised by sustained growth and low inflation, just like Goldilocks’ porridge – not too hot, not too cold, but just right. All around the world, the engines of recovery that were fired up in 2017 continue to chug along nicely: global trade is once again on track, companies’ order books are filling back up, job creation is speeding up, investment is picking up and consumer spending is firming up. This means that, in 2018, the major economic blocs will enjoy a synchronised ramping up of growth, which should hit 3.7% according to the IMF and the OECD.
For companies, valuations are flirting with levels that recall the peaks achieved during the dotcom bubble, and some observers are asking questions about the debt levels of the least solid firms. But who among these analysts – who are all singing from the same song sheet – is genuinely worried? With the economy in good health and, in the United States, the unhoped-for bonus in the form of the cut in corporate taxes, earnings outlooks keep on being revised upwards.
Financial world featherbedded
Similarly, there isn’t any apprehension on the monetary front, with the normalisation of central banks’ policies being widely anticipated, while low inflation is delaying tightening measures. As for external risks, extreme climatic events and geopolitical tensions, 2017 showed that they could be easily absorbed by the financial markets.
Having been featherbedded by the central banks since the 2008 financial crisis, the financial world today seems to have reached a point that brings together all the ingredients for financial happiness and a perpetual bull market.
A research stream has recently been developed – in particular by the Happiness Economics Institute, founded by Mickaël Mangot – which analyses the economic factors that determine individuals’ subjective well-being. There may be a certain correlation between an increase in income and the level of happiness, even if it is far from being the only factor that contributes to it. In recent years, the performances of all financial assets and the rise in real estate prices have created an environment that is ideal for happiness. If you add to that a low level of volatility (which is an indicator that risk perception is low), limited inflation and unemployment at close to its lowest levels ever seen in many countries, investors are certainly happy at the start of this year.
However, a more nuanced approach is needed, and the current euphoria is not necessarily meant to last.
Happiness not guaranteed in 2018
Indeed, for this state of happiness to last, there are two factors on which it depends, and these are difficult to guarantee for 2018. According to the 2014 study, Investor Happiness, by Merkle, Egan and Davies, as far as investment is concerned, happiness is conditioned by achieving performance expectations, which are themselves linked to past performance. However, given 2017’s outperformance, it will be tough to remain happy in 2018. Furthermore, the feeling of happiness also depends on the performance of your own investments in relation to those of others. This means that the surge in cryptocurrencies and some tech stocks in 2017 has tended to raise the expectations of certain investors who are frustrated at not having been able to ride this wave, and who are disappointed by the performance of their portfolios, despite their having made very comfortable progress. Financial happiness will therefore, without a doubt, be harder to achieve in 2018, even if there aren’t any clouds on the horizon.
CEO Private Banking