World's Largest Asset Manager Compares Market To A Horror Movie, Warns Complacency Is Back

When the portfolio manager for the world's largest asset manager warns that, following a torrid market surge which saw virtually every major asset in January post positive returns, something which Deutsche Bank said had never before been seen, the market resembles a horror movie, it's probably a good idea to listen. Because that's just what BlackRock's Russ Koesterich has done in his latest blog post, asking "Have investors shifted market sentiment too quickly", and giving three specific reasons why that is indeed the case.

Here is Koesterich's take on why markets have gone from despair to euphoria in the blink of an eye, and why this signals that complacency is once again back.

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Have investors shifted market sentiment too quickly?

As every fan of horror movies knows, the best way to elicit screams is to lull the audience into a false sense of security. It’s when everyone has relaxed, thinking the worst has past that the real fright occurs.

Since bottoming in late December, global equity markets have rallied more than 10% in dollar terms and market volatility has been cut in half. This raises the question: Have investors gone from panic to complacency too quickly? A few observations:

1. The economic data has not stabilized.

If part of what induced the unprecedented December selloff was the fear of an economic slowdown, it’s not clear why everyone has become more optimistic. While the global economy is not falling off a cliff, forward looking measures of growth continue to soften. China has been aggressively stimulating its economy, but the expected benefits have yet to materialize. At the same time, European data continues to disappoint, and even the U.S. is showing signs of weakness, particularly in housing. BlackRock’s proprietary measure of global growth still suggests further deceleration over the next six months (see Chart 1).

2. Volatility no longer looks too high relative to financial conditions.

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