Since the end of the deepest financial crisis the world has ever seen, in 2007, the stock markets value has continued to grow day by day, reaching up to its highest level ever.
The S&P 500 hit record highs again, with a sharp increase after the August lows. A similar situation seems to be evolving in the European markets, except for the FTSE Mib, which suffers from the structural weakness of the Italian Banking System and the public debt high level.
Chart 1: S&P 500, 2007-2019
The question then arises: is all that glitters gold? If we look at the political situation across the world, as well as the macroeconomics conjuncture, such optimism seems entirely misplaced.
Brexit in Britain and the growing tensions in Latin America will impact on the stock markets prices around the world. As of Brexit, the uncertainty around the next general elections result, in December, on which the type of Withdrawal agreement depends, is likely to drive the LSE stock index down and the Volatility index up, as has happened to the sterling recently.
From a macroeconomics perspective, the ongoing trade war between China and USA is expected to have a negative impact on the economies of both countries and on global growth. According to a report from the Federal Reserve, in the worst-case scenario the American GDP growth is expected to fall in the next few years, from 2.2% in 2018 to 1.8% in 2022, while the unemployment rate is expected to rise. Moreover, according to the International Monetary Fund report, the Global GDP will continue to grow, but at a slower pace compared to last year’s, while the Chinese GDP growth is expected to slow down, from 6.1% in 2019 to 5.8% in 2020. Even so, some progresses have been made in the last few days, and the reaching of an agreement seems to be more likely, but it’s still too early to crow. Looking at Europe, the German economy has been stagnating for the third quarter in a row and, given the strong relation between Italian export and German GDP, the situation is far from good.
So how come we don’t have a bear market? Why are investors ignoring all the signals?
One of the explanations for a bull stock market may lie in the economic policies. The expansive monetary policies, put in place by ECB and the Federal Reserve as a response to the Financial and the Sovereign Debt crisis, have put the Sovereign Bond yields down, driving the investors towards other asset classes. Statistically, the relation between Fixed income market and Stock market is negative, which means that when the fixed income market goes down, the equity market tends to go up. And that is what happened in the past few years.
However, in the last few weeks, there has been an awakening, with a few raising concerns about the economic situation overall and the Stock markets. Some market operators have started to talk about the possibility of a slump in the next few months, as the purchase of Call Options on Vix worth around half billion dollars by one anonymous investor shows. Moreover, looking at the price of Put options on S&P 500, as well as the transactions volume, it is possible to see a rising, which means that some investors are starting to buy protections against a possible collapse in the stock market. Is this the preparation of a new financial crisis? Or just a few pessimists’ bet?
In any case, fast your belt and enjoy your flight, we may have a little fun.
Source: Data Provided by FactSet