Last week was a busy week of newsflow as the firing of the FBI head, James Comey fired up pundits and conspiracy theorists, while over the weekend a massive, coordinated cyberattack hit computers from the UK health service to German trains to corporates in South East Asia. The attack of ransomware, named Wannacry, encrypted files and demanded payment in Bitcoin – sometimes in amounts of as little as $300. The scope and effectiveness of this latest attack didn’t impact markets, but did boost the growing segment of cyber security companies.
Markets remained buoyant over the week and two data points stood out: The first was the market cap of Apple topped $800 bn at the beginning of last week, the largest market cap for any US company. The second was the “vaporizing” of market volatility – the “battering of volatility indices to new lows” as sensationally reported in the media, saw the VIX falling to just 9.84 – the lowest level in over two decades. Some pundits linked this to the stemming of the tide of populism symbolized by Emmanuel Macron’s (expected) victory in the French presidential election, while other commentators suggest the complacency is propped up by unprecedented central bank intervention. Central banks (namely the BoJ, the ECB and the BoE) are buying up approximately $200 bn per month in fixed income assets placing a floor under prices and muting volatility.
Either way, the historical low levels of volatility have both boosted markets and spooked commentators, who believe the low levels of volatility are at odds with real extended valuations, particularly in US markets.
The chart below, showing the gulf between soft and hard economic data, is also instructive in this respect.
the gulf between soft and hard economic data, is also instructive in this respect. reality, and why the current market robustness has confounded seasoned investors.. Perhaps the dilemma is best summed up as follows:
“You see all time new highs day after day, a trajectory with very low volatility, valuation metrics that scare you. You’re terrified when you’re in and terrified when you’re out”[1]
Soft data (such as consumer sentiment and risk appetite) is most commonly cited as representative of the investor mindset, whereas in reality it is only hard data that provides any real insight into the health of the economy. As the chart shows “soft data” or survey and other indicators are currently far higher than the hard data would seem to justify. Are we in an era of severe wishful thinking?
[1] David Kotok, CIO at Cumberland Advisors, Sarasota FL