The U.S. equity markets have nothing to fear, writes one institutional money management firm. While this sound like good news prima facie, one powerful industry player is concerned about the absence of fear.
That is of concern, wrote Scott Migliori, U.S. Chief Investment Officer Equity for Allianz Global Investors in a note to clients. He also pointed out other fears, such as the fear of the end of the Fed’s bond buying spree and the fear the economy will slow down. If that were not enough, he also mentioned the fear of another high-profile trading glitch.
In his note to clients, Migliori wrote that as the end of the year approaches, U.S. equity market sentiment is one of complacency and an absence of fear. The year brought many events that had the potential to rile the equity markets — sequester enforced spending cuts, FOMC talk on tapering, the debt ceiling crisis and a government shutdown — but Migliiori noted that none of these events had hurt equities. In fact, prices remain high and the bias remains to the upside.
“It’s almost as if the markets have called politicians’ bluffs that they would ever do anything seriously disruptive, and therefore markets are now presuming market-friendly outcomes to all political “crises” absent clear and convincing evidence otherwise,” Migliori wrote.
And his observations are backed up by the data. For the week ended Wednesday, November 6, the Investment Company Institute reported that money continues to flow into equities. The market research firm reported that equity funds had estimated inflows of $7.91 billion for the week, compared to estimated inflows of $13.56 billion in the previous week. Domestic equity funds had estimated inflows of $4.28 billion vs. inflows of $9.19 billion, while estimated inflows to world equity funds were $3.62 billion vs. $4.37 billion.
In comparison, ICI reported bond funds had estimated outflows of $4.14 billion during the same time period, compared to estimated outflows of $2.32 billion during the previous week. Taxable bond funds saw estimated outflows of $3.36 billion, while municipal bond funds had estimated outflows of $789 million.
Further, according to a research note from ConvergEx’s chief market strategist Nicholas Colas, flows into equity exchange traded funds continue to run about $25 billion per month for U.S. listed products.
Looking forward, Migliori said there are fewer obvious roadblocks that might hamper market advances.
“If anything, the current environment is arguably as good as it gets for equities-slow but steady economic growth, benign inflation and monetary policy that appears set to be accommodative for much longer than anticipated even a few short months ago,” Migliori wrote.
Goldilocks, anyone? However, all that glitters isn’t necessarily gold. Some contrarians, Migliori noted, are concerned that too little to fear can ultimately be a bad thing for markets, as it results in excessive optimism and speculation.
Could this bring about an equities price bubble?
Given this backdrop, Migliori said it is not surprising that price-to-earnings multiples have continued to expand, in some cases in parabolic fashion (small caps, internet stocks, etc.) raising the prospect of a “melt-up” in equity prices as we enter the New Year. But that increase in prices and more subsequent buying could prove short-lived, he noted.
Migliori wrote, “While that is certainly a possible outcome, we believe it is more likely that new risks will emerge such as an uptick in unemployment or weakening of housing prices that will dampen speculative impulses and make for a steadier, and ultimately, more sustainable, market advance in 2014.”
