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It is quite a start to the New Year! Goldman Sachs issues a warning over extreme levels of risk appetite while, at the same time, cash flows are slowing.
(Bloomberg) Global stocks and U.S. Treasuries are in the throes of their most “extreme” start to the year ever as bullish sentiment engulfs markets, according to Goldman Sachs Group Inc.
The bank’s cross-asset measure of risk appetite around the world is the highest since it started the gauge in 1991. Euphoria is turbo-charging global equities while 10-year U.S. government bonds are suffering their worst performance in risk-adjusted terms, according to Goldman.
“Risk appetite is now at its highest level on record, which leads to the question of what future returns can be,” strategists including Ian Wright wrote in a Monday note.
Investors are enjoying the fastest global expansion since the start of the decade, strong corporate earnings growth and stable economic data. Equities around the world have added over $4 trillion this year, even as major gauges flash overbought signals, while premiums on U.S. corporate bonds are back to 2007 lows.
The economic outlook this year and next is better than previously anticipated but loose financial conditions and rich asset valuations suggest investors should guard against complacency, the International Monetary Fund said at the Davos gathering this week.
“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,” Goldman said.
Concerns over a flattening U.S. Treasury yield curve — a sign to some of a coming economic slowdown — have quieted down for the moment, thanks to the recent pick-up in longer-dated yields. But the potential slowdown message has an echo in diminishing corporate cash flows, SocGen strategists including Andrew Lapthorne have highlighted.
“If the cash-flow growth signal is correct, and that reinforces the yield-curve view” of the U.S. outlook, “then equity markets could be in for a nasty surprise,” according to SocGen.
One cause of this dysfunctional parable? Global Central Bank balance sheets are staggering in size (over $14 trillion).
And the Federal Reserve is changing engineers on their crazy train. From Yellen to Powell.
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