Two weeks ago, we showed that as a result of growing market euphoria and pervasive asset growth, Goldman was getting worried. Speaking at a conference in London, Goldman MD Christian Mueller-Glissmann warned investors, “valuations are at very high levels. And that concerns us when it comes to making progress in stocks, unless you maintain a very high level of optimism.” And as we showed then, the firm’s aggregate risk appetite index reached record highs in December – the same peak reached in 1999/2000 and 2007, just before the market crashed.
Fast forward to today, when Goldman’s Ian Wright provides an update on risk sentiment in the context of the global market rally that has accelerated since Goldman’s initial concerns on January. It will hardly come as a surprise that risk sentiment has also increased. In fact, it has never been higher.
First, a quick recap of what has happened so far in 2018 from Wright:
Global equities are having their best start to a year on record. MSCI AC World ($) is up 5.1% so far this year, which ranks as its best performance at this point in a year dating back to 1987.
Even more impressive is that risk-adjusted returns for MSCI AC World ($) are also the highest since we have data, and more than twice the next closest year since 1987.
In a cross-asset context, global equities have also been excellent, posting the best risk-adjusted return so far this year. This continues streaks already in place, with MSCI World adding to its current longest period without a 5% correction in history, and the S&P 500 achieving the same distinction last Friday.
Meanwhile, as stocks soar, bonds are getting a beatdown: as Goldman notes, global government bonds – particularly US Treasuries – have been the worst performing assets so far this year, in both absolute and risk-adjusted return terms. In fact, US 10-year Treasuries are having their worst risk-adjusted return to start a year on record.
CFTC positioning shows investors have benefited from these moves, with equity positioning long across markets, and US Treasury positioning short across the curve.
So are there any risks? Well, just one: the same one as Goldman pointed out at the start of January: “risk appetite is now at its highest level on record, which leads to the question of what future returns can be.”
But don’t worry: “While high risk appetite increases risk of disappointment, we find historically that the signal from macro data tends to trump the signal from risk appetite. We think this will be the case again now. We remain OW equity and UW bonds both 3 and 12 months given good growth, a solid macro backdrop, and our expectation of tighter monetary policy.”
Visually:
In other words, as long as momentum keeps stocks drifting higher for whatever reason, there is little to be worried about. And if and when that changes, we are confident that Goldman will be the first to let us know.
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