As we approach mid-June the S&P 500 is flirting with record highs, after technology stocks rallied and financials strengthened in expectation of a Fed rate rise. To the north, Canada’s central bank also looked to be set to raise rates, which caused that currency (CAD) to hit a two month high against the USD. In Europe, a strong showing from Emanuel Macron’s En Marche! party pointed towards a more stable backdrop to his policy initiatives, whereas in the UK the disappointing performance of the Conservative Party led to an increasingly gloomy outlook for the UK.
While this would seem to boost the prospects for Europe (ex-UK) and provide a firm foundation in the US, we remain wary of forecasts which are overwhelmingly exuberant for the US equity market. And these do exist, as we discovered at a meeting with a manager today.
The manager’s lofty projections included “Expect a great year for equities”, “Investor sentiment is finally improving”, “Stocks accelerate in bull market’s final third” and “Flat markets are usually followed by gangbuster ones”. It was good that we were seating while reading such lofty predictions. At this juncture, an absence of caution in predictions is a red flag, as is an absence of nuance and refinement in bullish sentiment. Is this blinkered view evidence of the final, dazzling, last gasp of a market that has run and run? We are very wary of such unbridled optimism, and would cite ongoing geo-political concerns, the impaired state of legislative progress, the resilience of short duration government bonds and the near record state of compressed volatility as evidence that we should be not at all complacent about the current state of market buoyancy. Just as June was the end (or nearly) of “May, Theresa”, high summer might snuff out markets’ Spring-like optimism.