Markets Have That ‘What, Me Worry?’ Attitude

Investing legend Sir John Templeton said that bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria. Whether markets are in the optimistic or euphoric phase is certainly debatable, but there’s no debating that investors are feeling better now about the outlook than any time since mid-2014 — and it’s probably justified.

That’s seen in a custom Bloomberg index that combines 18 indicators tracking equities, bonds, currencies, commodities, volatility and liquidity calibrated back to the financial crisis to measure whether markets are in a “risk-on” or “risk-off” mode. The gauge just surpassed its previous high of the year set in late January and its high before that in June 2015. Yes, late January was when risk assets took a nasty tumble and the same thing goes for mid-2015, so there’s a case to be made for too much complacency having crept back into markets. But it’s understandable, given that markets have weathered many events that just a few months ago were seen as potential triggers for a bear market, or at least some pretty major headwinds. The strategists at BNY Mellon say those events included doubts over a soft Brexit, the renegotiation of the North American Free Trade Agreement, Italian politics, an escalating trade war between the U.S. and China, and turmoil in such emerging markets as Turkey. Of course, these issues aren’t resolved, but almost nobody expects the worst-case scenarios that were predicted just a few months ago will come to pass.