“Investors’ latest love affair with equity markets may continue this year,” writes Nouriel Roubini on Project Syndicate. China’s growth appears to be stabilising. Brexit is becoming less of a headline issue (for global markets, at least). And central banks, most notably the Federal Reserve, have turned dovish in the face of market jitters.
But don’t get carried away by talk of a “market melt-up”, warns Roubini, who earned the nickname “Dr Doom” for his repeated warnings in advance of the 2008 financial crisis. Markets “tend to undergo manic-depressive cycles”, whereby overexuberant investors produce bull markets or even “outright bubbles”. But as sure as night follows day, the same overoptimistic investors will inevitably be pushed by “some negative shock” into being “far too pessimistic”. And the bad news is that there are plenty of potential negative shocks out there.
For one thing, US equities are expensive at a time when earnings are likely to come under pressure from rising wage bills. Many companies in the US are also heavily indebted, and their debt is of lower credit quality than in the past. And even if US growth holds up, the risk then is that the Fed decides it can raise interest rates after all, which would more than likely trigger a correction.
Throw in ongoing trade wars, fragile European growth, vulnerability in emerging markets from Argentina to Turkey, and now, soaring oil prices, and you have a recipe for disappointment.