Raphael Stevens

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European Central Bank President Christine Lagarde is giving a press conference following the bank’s latest monetary policy decision.

It comes after the bank’s policymakers lowered their annual growth forecast, as they confirmed a widely expected hold of interest rates.
ECB staff projections now see economic growth of 0.6% in 2024, from a prior forecast of 0.8%. Their inflation forecast for the year was brought to 2.3% from 2.7%.
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The S&P 500 has climbed for 16 of the last 18 weeks and closed at a new all-time high on Friday, but the gains have been heavily concentrated amongst the so-called “Magnificent 7.”
Despite comparisons with the market conditions of the late 90s, before the burst of the dotcom bubble, UBS strategists say “there’s no bubble ready to go pop.”
TS Lombard, meanwhile, says the current bull market is missing one crucial ingredient required to be deemed a bubble.

Traders work on the floor during morning trading at the New York Stock Exchange on March 6, 2024.
Spencer Platt | Getty Images

Despite the heavy concentration of the U.S. market rally in expensive, AI-focused tech stocks, analysts say Wall Street is not yet in bubble territory.
The S&P 500 has climbed for 16 of the last 18 weeks and notched a new all-time closing high on Friday, but the gains have been heavily concentrated among the so-called “Magnificent 7” tech behemoths, led by skyrocketing Nvidia.

The U.S. Federal Reserve, meanwhile, is expected to begin cutting interest rates in June, potentially supplying a further boon to high-growth tech stocks.
The sheer scale and narrow nature of the bull run have evoked some concern about a market bubble, and UBS strategists on Wednesday drew comparisons with the late 1990s.
In January 1995, when the Fed finished a cycle of interest rate hikes that took the Fed funds rate to 6%, the S&P 500 started on a bull run that delivered over 27% in annualized returns over the next five-plus years.
Until the bubble burst spectacularly in March 2000.
“The 90s bull run saw two phases: a broad, steady climb from early ’95 to mid ’98, and then a narrower, more explosive phase from late ’98 to early ’00,” UBS Chief Strategist Bhanu Baweja and his team said in the research note.

“Today’s sectoral patterns, narrowness, correlations, are similar to the second phase of the market; valuations are not far off either.”
Yet despite the surface-level similarities, Baweja argued that “there’s no bubble ready to go pop,” and pointed to notable differences in earnings, realized margins, free cash flow, IPO and M&A activity, as well as signals from options markets.
While sector-specific enthusiasm is evident today, UBS highlighted that it is not based solely on hype as was the case for much of the dotcom bubble, but on actual shareholder returns.
The missing ingredient
The top 10 companies in the S&P 500 account for around 34% of the index’s total market cap, TS Lombard highlighted in a research note Monday.
The research firm argued this concentration is warranted given the stellar earnings of these firms.
“However, it does mean that it is hard for the overall index to rally significantly without the participation of the Tech sector, and it also means that the index is vulnerable to the risks idiosyncratic to these companies,” said Skylar Montgomery Koning, senior global macro strategist at TS Lombard.
Yet the Fed’s dovish pivot and resilient economic growth in recent months have enabled stock market breadth to improve, both in terms of sectors and geography, with both European and Japanese indexes hitting all-time highs over recent weeks.
What’s more, Montgomery Koning argued that the equity gains thus far are justified by fundamentals, namely the policy and growth outlook, along with a strong fourth-quarter earnings season.

She said that every stock market bubble needs three ingredients to inflate: a solid fundamental story, a compelling narrative for future growth, and liquidity, leverage or both. While the AI-driven bull run meets the first two criteria, Montgomery Koning said the third appears to be lacking.
“Liquidity is still ample, but leverage is not yet at worrying levels. QT has not resulted in shrinking liquidity in the US so far, as reverse repos (which absorb reserves) declined faster than the balance sheet. In fact, liquidity has been increasing somewhat since the start of last year (there is a risk that 2024 Fed cuts will add to the froth),” she said.
“But leverage doesn’t look worrying; margin debt and options open interest suggest that it’s not speculation driving the rally. There has been a small rise in margin debt but nowhere near the highs of 2020.”
The bad news?
The absence of a bubble does not necessarily imply that the market will continue to rise, UBS pointed out, with Baweja noting that productivity growth looks “nothing like it did in the 1990s.”
“Sure, this can change, but data today on electronics and info tech orders, capex intentions and actual capex doesn’t at all suggest the capital deepening associated with a productivity boost,” he said.
“Our metric of globalisation shows it is stalled (weakening, actually) compared to the late 1990s, when it grew the fastest. The economy is late cycle today.”
The current configuration of the economy is closest to that seen at the end of the 90s bull run and into early 2000, UBS believes, with real disposable income growth “weak and likely to get weaker. Baweja suggested that these variables need to start looking rosier in order for the bull run to persist sustainably. More

You could spot a fake a mile off. The plasticky “Prado” wallets arranged on bedsheets on the pavements lining Canal Street in New York bore only a passing resemblance to the ones for sale in the Prada store in Soho. The fake Chanel bags they lay next to were lumpy, misshapen and smelled a little like petrol. An attempt to make a quick buck by buying one and passing it off as genuine—perhaps by taking it to a small local consignment store—would have been met with raised eyebrows and a chuckle.What an innocent time. Now booming demand, technological improvements and sheer opportunism have transformed the market for buying and selling luxury bags. lvmh, a luxury conglomerate, sold about €10bn-worth ($13bn) of leather goods in 2013. By 2023 it was selling €42bn-worth—a 320% increase in just ten years. (The global economy, by contrast, grew by only 30%.) Dedicated reselling platforms, such as the RealReal and Vestiaire Collective, have expanded rapidly. Revenues from reselling luxury bags and clothing now add up to around $200bn a year. So producers of counterfeits have upped their game, too. Women now gather in Reddit groups to “QC” (quality check) bags they order from China via WeChat. Called “superfakes” by the New York Times, such dupes are often spot on—down to having the correct number of stitches on each side of the classic Chanel quilted diamond (up to 11, apparently). They cost about a tenth of the regular price. More

Hire a wealth manager, and one of their first tasks will be to work out your attitude to risk. If you are not sure exactly what this means, the questions are unlikely to help. They range from the inane (“How do you think a friend who knows you well would describe your attitude to taking financial risks?”) to the baffling (“Many television programmes now have a welter of fast whizzing images. Do you find these a) interesting; b) irritating; or c) amusing but they distract from the message of the programme?”). This is not necessarily a sign that your new adviser is destined to annoy you. Instead, it hints at something fundamental. Risk sits at the heart of financial markets. But trying to pin down precisely what it is, let alone how much of it you want and which investment choices should follow, can be maddening.To get around this, most investors instead think about volatility, which has the advantage of being much easier to define and measure. Volatility describes the spread of outcomes in a bell-curve-like probability distribution. Outcomes close to the centre are always the most likely; volatility determines how wide a range counts as “close”. High volatility also raises the chances of getting an extreme result: in investment terms, an enormous gain or a crushing loss. You can gauge a stock’s volatility by looking at how wildly it has moved in the past or, alternatively, how expensive it is to insure it against big jumps in the future.All this feels pretty risk-like, even if a nagging doubt remains that real-life worries lack the symmetry of a bell curve: cross the road carelessly and you risk getting run over; there is no equally probable and correspondingly wonderful upside. But set such qualms aside, pretend volatility is risk and you can construct an entire theory of investment allowing everyone to build portfolios that maximise their returns according to their neuroticism. In 1952 Harry Markowitz did just this, and later won a Nobel prize for it. His Modern Portfolio Theory (MPT) is almost certainly the framework your new wealth manager is using to translate your attitude to risk into a set of investments. The trouble is that it is broken. For it turns out that a crucial tenet of MPT—that taking more risk rewards you with a higher expected return—is not true at all.Elroy Dimson, Paul Marsh and Mike Staunton, a trio of academics, demonstrate this in UBS’s Global Investment Returns Yearbook, an update to which has just been released. They examine the prices of American shares since 1963 and British ones since 1984, ordering them by volatility and then calculating how those in each part of the distribution actually performed. For medium and low volatilities, the results are disappointing for adherents of MPT: returns are clustered, with volatility having barely any discernible effect. Among the riskiest stocks, things are even worse. Far from offering outsized returns, they dramatically underperformed the rest.The Yearbook’s authors are too thorough to present such results without caveats. For both countries, the riskiest stocks tended to also be those of corporate minnows, accounting for just 7% of total market value on average. Conversely, the least risky companies were disproportionately likely to be giants, accounting for 41% and 58% of market value in America and Britain respectively. This scuppers the chances of pairing a big long position in low-volatility stocks with a matching short position in high-volatility ones, which would be the obvious trading strategy for profiting from the anomaly and arbitraging it away. In any case, short positions are inherently riskier than long ones, so shorting the market’s jumpiest stocks would be a tough sell to clients.Yet it is now clear that no rational investor ought to be buying such stocks, given they can expect to be punished, not rewarded, for taking more risk. Nor is the fact that they were risky only obvious in hindsight: it is unlikely that the illiquid shares of small firms vulnerable to competition and economic headwinds ever looked a great deal safer. Meanwhile, lower down the risk spectrum, the surprise is that more people do not realise that the least volatile stocks yield similar returns for less risk, and seek them out.Readers may not be flabbergasted by the conclusion—that investors are not entirely rational after all. They might still wish to take another look at the racier bits of their portfolios. Perhaps those are the positions that will lead to a gilded retirement. History, though, suggests that they might be speculation for speculation’s sake. Call it return-free risk.■Read more from Buttonwood, our columnist on financial markets: Uranium prices are soaring. Investors should be careful (Feb 28th)Should you put all your savings into stocks? (Feb 19th)Investing in commodities has become nightmarishly difficult (Feb 16th)Also: How the Buttonwood column got its name More