In the markets there is always someone who buys and someone who sells. Buyers and sellers are usually in a relatively relaxed mood. Sometimes, as happens in the crash, the sellers are as nervous as those going to the gallows and the buyers as calm as the executioner. Over short squeezeOn the contrary, it is those who feel (or are) forced to buy that are nervous, while the sellers are serene and enjoy themselves.
Sometimes, like in this period, both those inside the market and those outside are nervous. Let's be clear, there is no panic and there is no uncontrolled enthusiasm and the markets, apparently, can also seem orderly and even bored. Beneath the tranquil surface, however, you may begin to see the bubbles of nervousness. The water is heating up.
Who is invested wonders if it is not the case to go out. This happens especially to those who have been in the market in all these years of rising bonds and stocks and has a long-term view. Stock ratings, at least in America, are the highest of all time with the exception of 2000. unemployment has fallen at the level that normally induces the central bank to hit the brakes. The electoral cycle, the one in which economic policies become more expansive in the quarters preceding the vote, is about to end. It started with the referendum on Brexit and will end in September with the German vote and, shortly thereafter, Italian. At the same time the China will hold its congress, an event involving only the party and which in any case corresponds to an election with a narrow electoral base.
Even those who entered in November after the American elections are a bit nervous. The Trump rally had solid foundations, in equities, given the new administration's aggressive and pro-growth agenda. Now, however, after six months of growth, we find ourselves having to deal with aabsence of results and with considerable confusion about the prospects. We console ourselves with profits, which however have improved patchily and not across the board. The major contribution to their growth has been made by the companies that produce raw materials and oil, but it is precisely in these two sectors that we are beginning to see some air gaps. Very quietly the stock exchange is resuming its Obama configuration, with the cyclicals in trouble and the defensives and the big monsters of technology to keep up the indices.
On the other side of the river, however, potential buyers are also a bit nervous, those who have light risk portfolios and who have spent these years trying to forget the anguish of 2008 (and for those who live in Italy also that of 2011 ) by being invested in rest-friendly products. Or even those that came out too soon, maybe in 2014 (when the Fed started talking about rate hikes) or 2016 (when China seemed to implode or right after Brexit).
Now these investors, if they open the newspapers or watch television, hear only positive or reassuring news and see the markets continuing to rise calmly. The great election cycle of uncertainty is about to end without having produced the feared upheavals, the global economy is of no concern, there are no imminent financial disasters in the air, China has returned to its opacity, the currency wars are no more, capital is fleeing nowhere.
For the first time since 2009, in short, all systems are Go, as they say in Houston when they launch rockets, all traffic lights are green. As for valuations, for a large class of investors they are not necessarily a problem because they are always questionable and because they are less important, in their eyes, than momentum, which is easily measurable and verifiable. But that's not all, because the chorus of those who say that the stock markets of Europe, Japan and emerging countries are undervalued (at least in relative terms) has become very strong.
Many, therefore, are ready to leave but many finally feel ready to enter. It's a situation, on closer inspection, typical of the beginning of the final phase of any major equity rally. And in these cases, everyone is right, in their own way. Those who want to exit are right if they remain consistent with a long and slow operating pace, that is, if they prepare to exit to return only to the next recession (or at least to the next significant downturn) and not simply the 5 percent below. Those who enter are right because the final part of a cycle can sometimes allow conspicuous and moreover fast gains, but they must be very careful to catch the signs of stress, the cracks that herald the next fall.
These cracks are usually not represented by financial incidents (which if they occur in a healthy context are actually purchase opportunities) but from a over-positioning or loss of momentum in the economy. These last two factors, if they occur one at a time, produce only an adjustment, if they occur together, they produce the fall.
So far we have described only two extreme situations, that of those who have always been invested in recent years and that of those who have always kept themselves out of risk. There However, most portfolios are somewhere in between. In this case we suggest some points for reflection.
Before considering whether to reduce or increase the risk profile, it makes sense to allocate it optimally. Away from America, therefore, except in special cases, and away from the dollar not because spectacular trend reversals are in sight but simply because there are better opportunities in Europe, Japan and emerging countries, both in terms of shares and currencies.
Once this is done, the upside can be allowed to run and limited to isolated gains until September for two reasons. The first is that in America, even in the worst case in which no reform comes out of Congress in the end, the market will continue to hope for a few more months. The second is that the ECB will do nothing serious to disturb the flow of positive economic news at least until the September elections in Germany and probably Italy.
Between August and September, if in the meantime the market has strengthened further, it will be possible to begin to lighten Europe more seriously, arriving with a neutral positioning in the final months of the year, when the ECB will assume a more normalizing stance on rates and Quantitative easing.
Lastly, to be relieved, will be Italy, in the probable case that systemic forces continue to prevail in the end. For Europe and for Italy, we bear in mind that the flows of investment from abroad, once set in motion by positive or in any case reassuring events, last at least two to three months.
In practice, rather than rushing to sell if Macron's victory will give another good rise starting Monday, it will be a question of set up a gradual and dosed program of lightening to be distributed between the end of August and the end of the year. If in the meantime positive signals on the reforms arrive from America, as is still perfectly possible, the relief program could be further slowed down or perhaps suspended.
