What could possibly go wrong?

WHAT COULD POSSIBLY GO WRONG?

A U.S. economy that is strong (but not too strong) should be "music to the ears" for traders, according to George Lagarias, chief economist at Mazars Wealth Management, but caution is still warranted due to inflation uncertainty and geopolitics.

"The US economy is strong, but recent data suggest that it may be just not strong enough to divert the Fed from cutting rates this year," Lagarias says, citing recent GDP, employment and retail sales figures.

That slightly disappointing data pushed stocks and bonds higher last week as markets added to bets that the Fed would cut interest rates twice by the end of the year.

U.S. SPX and European equities SXXP are at, or close to, record highs, while bonds have rebounded from yearly lows.

And while equity valuations are high, Lagarias thinks they are not too high versus history amid growing U.S. earnings, while positioning appears relatively neutral, with leveraged bets on the S&P barely net short.

"This is the perfect macroeconomic environment for traders," Lagarias says.

So, what are the risks?

"Very few of the known knowns to be sure," says Lagarias, mentioning valuations, earnings and the Fed.

"It's down to the known unknowns (war, inflation) to take a bad turn and of course the unknown unknowns."

But with equity risk premiums low, as measured by the differential between the earnings yield and bond yields, it would suggest that investors aren't getting paid for assuming U.S. equity risk, Lagarias says.

"Therein lies the conundrum. We don't see major risks playing out, but we aren't certain investors are paid enough to materially increase risk either," says Lagarias.

"The environment for major tactical asset allocation decisions is, to say the least, difficult."

(Samuel Indyk)

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MONDAY'S OTHER LIVE MARKETS POSTS:

EUROPEAN STOCKS: "IN THE SWEET SPOT" CLICK HERE

STEADY START FOR EUROPEAN SHARES CLICK HERE

EUROPEAN FUTURES INCH UP CLICK HERE

METALS ZOOM AS INVESTORS WAIT ON RATES CLICK HERE