Do stock-market investors think equity benchmarks are bulletproof? This question is popping up more frequently as investors contemplate an increasingly volatile landscape in Washington set against a backdrop of repeat records for major stock benchmarks.
Not everyone’s so polite. Plenty just want to know if Wall Street has lost its mind.
To be sure, equities flirting with near-constant new highs should be hailed as an unequivocal positive. However, a sense that calamity might be just around the corner has been looming like a sword of Damocles. A shortlist of anxiety-provoking events has taken on new significance lately, as markets, operating in the realm of rarefied air, seem to be trading on hope alone.
Here’s some of the recent drama:
1). Late Monday, the Washington Post reported that President Donald Trump shared classified information with Russian officials. According to legal experts, Trump has the presidential authority to do this because he is the ultimate arbiter of what is deemed classified.
In any case, officials from the Trump administration flatly denied that the president provided such intelligence to Russian Foreign Minister Sergei Lavrov and Russian Ambassador Sergei Kislya during a meeting last week. Still, an important takeaway from recent articles is that concerns center on fears that Trump’s revelations may compromise U.S. intelligence operatives and relationships.
Trump had this to say on Tuesday in response to the reports over Twitter:
As President I wanted to share with Russia (at an openly scheduled W.H. meeting) which I have the absolute right to do, facts pertaining....— Donald J. Trump (@realDonaldTrump) May 16, 2017
...to terrorism and airline flight safety. Humanitarian reasons, plus I want Russia to greatly step up their fight against ISIS & terrorism.— Donald J. Trump (@realDonaldTrump) May 16, 2017
Trump’s apparent defense of his actions came after national security adviser Lt. Gen. H.R. McMaster said in a statement outside the White House on Monday that. “I was in the room. It didn’t happen,” referring to the intelligence sharing. He later repeated those views at a news conference on Tuesday describing the president’s actions as “wholly appropriate.”
2). Monday’s drama comes less than a week after Trump surprisingly fired former Federal Bureau of Investigation Director James Comey, sparking a firestorm inside and outside Washington, given that the top agent was in the process of investigating Russia’s ties to members of Trump’s presidential campaign in November. Members of the intelligence community have said that Russia had a hand in helping Trump come to power.
3). North Korean has stepped up its military aggressions, launching a ballistic missile on Sunday that could potentially hit U.S. territory in Guam and other countries near Pyongyang neighbors. The test was viewed as fresh antagonism to President Trump and South Korea’s newly minted leader Moon Jae-in.
4). A cyberattack over the weekend spread across 150 countries. The so-called WannaCry malware claimed more than 200,000 victims by attacking weakness in Microsoft Corp. MSFT, >+0.03% software that mostly hadn’t been upgraded and so couldn’t be helped by the company’s patch. Experts fret that this is evidence of the sophistication of malicious hackers that could lead to more disruptions across the globe.
That’s naming just a few.
Still, markets aren’t budging. In fact, the Nasdaq Composite Index COMP, >-0.64% closed a record on back-to-back days, while the S&P 500 index, Dow Jones Industrial Average DJIA, >-0.23% aren’t far from all-time highs.
A measure of fear on Wall Street, the CBOE Volatility Index VIX, >+11.03% has been hovering around record lows, implying that volatility 30-days from now will be muted in broad-market S&P 500. That might seem difficult to fathom based on the recent roundup of news.
But so far, the market has mostly ignored the drama in Washington, even though it suggests that Trump could face serious threats to his ability to get what’s perceived as Wall Street-friendly legislation passed—simply the prospect of such legislation has helped push global equities into the stratosphere:
“The White House has got to do something soon to bring itself under control and in order. It’s got to happen,” said Tennessee Republican Sen. Bob Corker, responding to the recent Trump/Russia news.
Indeed, the White House might seem to be out of sync to some, given the conflicting takes of Trump’s tweets with other members of his administration. A feud between the White House and the intelligence community also seems to be afoot.
So, what gives? MarketWatch’s William Watts explains some of the factors at play, helping to ease tensions, including corporate earnings that have come in better than expected and the belief that White House drama isn’t truly a market story.
Steve Barrow, head of strategy at Standard Bank, in a Tuesday note offers some views of his own on why the market is being spirited higher. He makes the case that there is liquidity aplenty in the market. Meaning that there is a sufficient number of buyers and sellers willing to take bets on assets perceived as risky, like stocks.
In our view the slide in volatility reflects a surfeit of liquidity. We have argued many times in the past that liquidity and volatility tend to be the mirror image of one another: when liquidity is high volatility is low, and vice versa. This is easy to see in times of acute stress because market liquidity shrinks and asset prices become very volatile.
Raymond James market strategist Andrew Adams in a Tuesday research note said part of the reason the market continues to trend higher is the fear of missing out on gains, colloquially called FOMO.
Yet, with earnings growing once more, the market continuing to shrug off the political headlines, and few attractive alternatives to stocks, FOMO has left both individual and institutional investors with little choice but to keep riding the market’s long-term trend despite the inherent risks.
An important point to consider is that Wall Street has enjoyed an uptrend in improving economic fundamentals world-wide. Trump had promised to supercharge the economy, a pledge that has led to markets gingerly taking out records, but that rally has receded from an earlier breakneck pace after Trump’s November election win.
“Equities, forever the hope-and-prayer asset class, are still seated in their pews. The preachers of the marketplace continue to offer salvation, if not outright redemption, and ‘Glory Hallelujah’ still echoes through the halls of the New York Stock Exchange,” wrote Mark Grant, chief strategist at Hilltop Securities in a Tuesday research note.
“I hear the fervent sounds, all right, but I am beginning to wonder if the chorus isn’t about to thin,” he said.
Source : http://www.marketwatch.com/story/wall-street-may-be-lulled-into-a-dangerous-sense-the-stock-market-is-invincible-2017-05-16