Should investors be worrying that a bear market is about to descend on us?
The big disconnect today is between the undoubted geopolitical stresses round the world and markets still hovering at close to record levels. A number of investors whom I greatly respect have in recent weeks told me they believe that the next market movement has to be downwards. Valuations of many asset classes are higher than has ever been sustained for long, central banks are loudly announcing their intention to withdraw the monetary stimulus we are hooked on and, although economic growth seems to be stable, there is no shortage of things to worry about. And yet, unless there is a major geopolitical or financial 'event' to cause a crash in investor confidence, I am not sure we are on the brink of a bear market. It will come eventually, I agree, but I'm only seeing trouble ahead in the distance.
There is no doubt that investors are holding high levels of cash, which suggests that buyers will come in if there is a price dip. And our friends at CrossBorder's end-September liquidity data does not suggest anything disastrous is about to happen. Yes, global levels are below average and the US, in particular, is looking vulnerable. On the other hand Europe and the UK are seeing strong liquidity flows, and China and Emerging Markets, while lower than recently, are still high. CrossBorder (the clue is in the name!) pay close attention to cross border flows because a sharp fall in them is often the harbinger of a market fall. These are currently at all time highs, which means there is only way they can go, but we aren't seeing falls yet. I also note that bond markets and volatility indices, both usually leading indicators of trouble ahead, are calm.
With the remains of hurricane Ophelia approaching Ireland, I am aware of the danger of repeating Michael Fish's claim to fame when I suggest that a bear market is not about to descend on us. Markets will fall one day: that is certain. My point is that, unless there is an obvious event which causes investors' risk appetite to nosedive, I believe we are still several quarters, and possibly years, away.
If you would like to purchase CrossBorder's latest major markets update with end September liquidity and cross border flows data, please find out more here.