However, apart from a blip in March and April markets have been resilient to a host of headwinds that in previous years might have caused a sell off.
This year so far has been littered with seemingly grave concern for equity markets – Iraq, Ukraine and poor US GDP growth to name a few. Most recently, the largest Portuguese bank – Banco Espirito Santo – voiced concerns about needing a potential bail out.
All this has come with the S&P at an all-time high, and the FTSE not far off either. Many have voiced worries about valuations, and earnings growth hasn’t come through as the bulls expected. Indeed, there have been a number of high profile downgrades, including the likes of Rolls-Royce.
The news from Portugal sounded like a repetition of 2011 but without the resulting investor panic, according to Rowan Dartington’s Guy Stephens.
“It felt like an echo of the European banking crisis and then everyone remembered what happened in Cyprus and that Mr Draghi was still there with his pledge ‘to do whatever it takes’,” he said.
“It is now viewed as an isolated story of last week, wrapped up in a family run business and is no threat to the Euro.”
With the exception of the Nikkei, all of the major market indices are in positive territory this year. On now three occasions, the FTSE All Share has approached its all-time high, fallen back 5 per cent or so to 6,600, only to grind higher again.
Performance of indices in 2014
Source: FE Analytics
As well as Draghi’s willingness to provide a backstop, Stephens says the robustness of the market is down to a lack of opportunity outside of equities, with investors rational not to dump assets in negative yielding cash.
He says something far more dramatic will have to happen for markets to correct on a scale of 2008 or even 2011.
“The available alternatives to equities require a lot of fear to re-emerge before they become attractive,” he said.
“The perceived opportunity cost of selling the equity market is high and this is why events that would have caused mayhem two or three years ago are currently causing just a temporary ripple.”
Performance of indices 2007-2012
Source: FE Analytics
“If we get a correction, it will have to take a significant event to bring it about due to the lack of selling appetite and the opportunity cost in doing so.”
Stephens thinks that the market could grind higher still, as the bears become more and more frustrated.
“There is a real chance of a capitulation bear squeeze where the bears throw in the towel and buy a rising market as the opportunity costs become too much to pay,” he said.
Equilibrium’s Mike Deverell (pictured) says the greater faith in central banks may explain equity investors’ willingness to stick with equity holdings despite warning signals such as the case of Banco Espirito Santo.
“There is a lot of faith being shown in central banks and their ability to deal with issues as they arise – the whole Mario Draghi will do ‘whatever it takes’,” he said.“The market shrugged it off after a day. When experts said it would be OK the market believed them. However peripheral European bond yields are a bit higher than they were.”
The market European government debt did rise following the news but the effect was muted.
“To be fair, there is a lot more willingness from central banks to do things than previously, and there is a greater understanding of that.”
FE Alpha Manager Hugh Hendry admitted late last year that he was buying back into risk assets even though he wasn’t convinced by the global recovery, because central banks were so supportive.
Deverell agrees that the lack of opportunities outside of equity markets has kept money on the table, but says that investors should be encouraged by the shape of corporates and the recovery in the developed world.
“You have improving economies in developed markets and so unless something completely disastrous happens, and that usually results in companies doing better and growing their earnings. I can see the markets going up a little bit from here,” he said.
Both Deverell and Stephen say any correction is likely to be generated from the US.
Stephens says some hawkish comments from the Fed would do it, or worrying inflation data, but that none of them are particularly likely at the moment.
There was an unexpected spike in inflation in the UK in June, up from 1.6 to 1.9 per cent.
However, again the market shrugged off the news.
The other potential risk is a sudden rise in interest rates, Stephen says, but again he thinks this is unlikely.
“Exceptionally strong earnings releases or wage growth would bring forward increases in interest rates but again, this seems unlikely,” he said.
Mark Carney recently admitted that his Mansion House speech last month, which claimed markets were underestimating the prospect of interest rate rises, was intended to provoke and shake up markets into action.
Stephens believes that markets will remain in limbo for the time being, waiting for either an unexpected crisis or a wave of earnings upgrades breaks the stubborn resolve of pessimists.
“There is strong resistance to the FTSE-100 breaking through 6,930 – the previous high first set at the peak of the technology bubble in December 1999,” he said.
Performance of index over 7yrs
Source: FE Analytics
“Since 2007 we have recovered once more and it feels very uncomfortable as a result, having twice previously been the pre-cursor to something really nasty. Psychologically, this is quite similar to the investor psyche of the 1990s when the crash of 1987 was recovered in two years but then took another two before breaking through into new territory.”
Deverell says if markets were to see a pullback it would likely to be fairly contained and no more than 10 per cent, unless something disastrous happened on the scale of the financial crisis.
