After years of weathering difficult events without experiencing significant corrections, the market seems to be unstoppable. This has prompted speculation of complacency among some commentators. But one investing expert rejects such speculation.
“I, for one, do not think the market is complacent,” said Manulife Chief Investment Officer for US Fixed Income John Addeo in a recent commentary. “Rather, I believe we might be framing the discussion incorrectly.”
Addeo argued that the discourse on complacency is an attempt to better define any risks that markets might need to confront in the near term. These include macro risks like inflationary or deflationary pressure, policy risks arising from politics and the unwinding of extraordinary monetary policies, and fundamental-level corporate risks.
“Ultimately, however, I believe the current unease is centered around valuation,” he said. Specifically, he referred to the possibility of risk being mispriced and overvaluations becoming a systematic risk that could deflate the market.
He explained that complacency, in his view, is a feeling of satisfaction from a lack of concern or awareness of investment risks. But there is no causal relationship between complacency and overvaluation; one doesn’t cause the other. Rather, overvaluation happens when trades become crowded.
Rather than discussions on complacency, he said, there should be more thought on what happens when an exogenous shock hits the market. In that case, there’s a danger of investors de-risking en masse, and switching to the same set of safe havens; active managers would have options to deal with potentially evaporating liquidity, while passive investors will not have those choices. Valuations would become a real issue as holdings inflated by passive products could later spark over-selling as markets head south.
Current invocations of complacency, Addeo added, could be down to the desire to describe and explain market phenomena that are difficult to comprehend; alternatively, it could be just a rote habit we’ve developed after several major market bubbles where complacency played a major role.
“While I do not believe we are complacent, I am wary of the risk of complacency – more specifically, complacency fatigue,” he said. The past few years, he explained, have seen investors feel like they should worry about several market risk events, only for the markets to rally. Those experiences could have taught us that not acting on our worries could prove profitable.
“To me, that’s the biggest worry of all,” he said.
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