Hope all is well with you and family .  What do you make of the markets lack of volatility and remarkable resilience in the face of all the geopolitical risks that are occurring.  Is it because everyone is stuck in passive index funds?  Doesn't it make the rollover when it occurs more severe?  Maybe I'm getting old.

Eoin Treacy's view

Thank you for this question which I sense many people are asking. I agree the number of geopolitical questions which have arisen over the last couple of years represent an additional risk premium for markets. However the biggest question is whether these developments and potential future ramifications make the case for policy tightening more or less compelling. 

Wall Street has been rallying since early 2009 and valuations are no longer cheap in the majority of cases. However the big question is whether fiscal stimulus is going to take the place of monetary stimulus in providing fuel to the stock market rally. The next few months will give us additional insight into just how likely that is in the USA, UK and Europe. 

Meanwhile the first round French election result has re-emboldened the bulls and the first Trump/Xi meeting passed off amicably. It occurs to me that the USA can afford to be less engaged in the Middle East since the advent of unconventional oil and renewable energy. The resulting political/military vacuum is being fought over right now with Russia and Iran being the clearest beneficiaries. This represents massive change to the status quo but it is arguable how much of a negative effect it is likely to have on the business models of companies. 

The continued surge in demand for passive funds does represent a powerful source of potential supply when the market does eventually turn. However at the same time we need to ask ourselves whether there is evidence of the kind of top formation characteristics which would stoke a sell-off. Right now the most we can say is that we are coming to the end of the most favourable seasonal period and overextensions relative to the trend mean are evident. The potential for a reversion to the mean remains undiminished but there is no evidence of major top formative development right now.