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The stock market has had its best start to the year since 1987. However, according to several strategists, the rally bears the symptoms of a sudden turnaround – a change they hope to follow soon.
With the Federal Reserve's change of direction, investors reversed the correction at the end of last year, believing the central bank would not allow high interest rates to stifle the economy.
Despite this powerful catalyst, strategists, including Albert Edwards of Societe Generale, have identified disturbing features of the rally that foreshadow a danger.
In a recent memo addressed to his clients, Edwards himself is opposed to other experts who are betting that the rally is a precursor to a continuing merger that could accelerate if the season of current results exceeds expectations.
For those who would prefer to dismiss Edwards' ideas as the wanderings of another permanent bear, he reminded readers of some of the precious calls he had made more than a decade ago. He added that central banks would be forced to lower their interest rates to zero in the next recession and that they should buy bonds to keep borrowing costs low. level.
Edwards once again launches his forecasts, drawing on the research of other Wall Street colleagues. Here are four things he wants to keep investors in mind:
1. The mute money is too bullish.
This concerns small investors – usually placed in contrast to "smart" Wall Street institutions – who are waiting for a rebound to be well underway before finding the courage to buy stocks.
In other words, the stupid money becomes exuberant and buys at the top for fear of missing.
If one refers to the so-called confidence index in silly money, the stock market could find itself at another point of inflection, according to Edwards. The index, prepared by Sundial Capital Research, is at its highest level since 2010. And according to the firm, the S & P 500 index has recorded a negative return 2 to 8 weeks after similar readings during of the last 20 years.
2. Volatility is extremely low.
This lull does not exist only on the stock market, where it is measured by the CBOE volatility index. The volatility of the dollar, treasury bills and high-yield debt is also close to all-time lows.
But what differentiates stocks from other badet clbades is that periods of low volatility are usually followed by market declines – and these sales tend to be more violent than takeovers.
Edwards' viewpoint does not even take into account the limited liquidity of the market, which could amplify the losses suffered during a surge of volatility.
3. Some economic data remains poor.
Edwards pointed out that inventories are strengthening despite declining manufacturing data in developed countries, including the United States and Japan. In addition, world trade volumes are declining.
He explains why these trends go against the rise is that investors believe that the Fed is now on their side – no longer raises the rates on the autopilot, but is ready to brake the brakes if necessary.
4. Actions can rally – and have rallied – leading to recessions.
"Traditionally, stock markets were picking up after the latest rate hike and any rebound should be sold if you think the economy is heading into recession," Edwards said.
He continued, "The problem is that no one ever foresees an impending recession." The survey followed by BAML Global Fund Manager reveals that 70% of investors surveyed expect a global recession to begin. in the second half of 2020 or more believe that the inversion of the yield curve does not signal an imminent recession! Will you then crowd in the shares at the same time as the dumb currency? "
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