Investors are too optimistic and taking on too much risk in this low volatile environment, setting the stock market up for a potential downfall.
"In a goldilocks scenario of low interest rates, abundant liquidity, stable growth and a focus on the 'good' Trump, investors continue to push asset prices, volatility and leverage to historical extremes," said Alain Bokobza, head of global asset allocation at Societe Generale.
"Yet, a low volatility carry environment with rather extreme positioning is a dangerous combination, which we recently likened to dancing on the rim of a volcano."
U.S. stocks have been on fire this year. The S&P 500 is up more than 15 percent in 2017, boosted by strong corporate earnings, expectations of a U.S. tax code overhaul and improving global economic conditions. Monetary policy — which has been a boon for stocks since the financial crisis — also remains loose compared with historical standards.
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