A Portuguese election stalemate. Greece in danger of flunking a bailout review. A US debt ceiling standoff. Wobbly economic data. If this were 2009, 2010, 2011, 2012, 2013 or even 2014, these items would have set investors on Red Alert. Yet this time around, headlines are far more calm, assuming they even bother reporting the latest. This is a strong indication of how sentiment has evolved: Investors are becoming more optimistic, as is typical of a maturing bull market—but a smattering of lingering fear shows euphoria remains at bay, suggesting this bull market has room to run.
Portugal’s election is perhaps the most striking example. Closely fought elections in the eurozone periphery have roiled investors since the debt crisis metastasized, and Portugal’s electoral saga read like a greatest hits of messy eurozone votes. On October 4, Portugal’s governing center-right coalition, led by Prime Minister Pedro Passos Coelho, won the most votes but lost its parliamentary majority, taking 107 of the 230 seats. Initially, the opposition Socialist Party said it wouldn’t block a center-right minority government, but negotiations for their support broke down as the Socialists opened side talks with far-left parties, including the euroskeptic Left Bloc and Green/Communist alliance. Together, the Socialists and leftists won enough seats to form a majority left-leaning coalition government, and on October 20, Socialist leader Antonio Costa announced they’d reached a deal to form a pro-euro government that would honor all Portugal’s EU agreements and prior bailout commitments.
But Portugal’s Constitution gives the President the power to name the Prime Minister. President Aníbal Cavaco Silva named Passos Coelho Prime Minister, citing concerns over the Communists’ and Left Bloc’s euroskepticism despite Costa’s assurance his party’s pro-euro stance would carry the day. Passos Coelho formed a cabinet in the following days and released their legislative program on Thursday. But the minority government can’t officially take power until they win a confidence vote in Parliament, a vote the Socialists and leftist parties have already vowed to block next week. If that happens, uncertainty abounds. Cavaco Silva could name Costa Prime Minister and give his coalition a shot, or he could appoint a caretaker government to shepherd the country until another round of elections next April. Adding another wrinkle, Cavaco Silva’s term expires in January. Meanwhile, Portugal has already missed the deadline for submitting its 2016 budget to EU authorities for their stamp of approval, and Brussels is getting twitchy.
If this happened before last year, while Portugal was still in its bailout program, we probably would have seen a mass freakout, rather than the present smattering of fear. When Greece had a similarly inconclusive election in April 2012, global markets suffered a correction as the stalemate drove fears Greece would renege on all its bailout commitments and crash out of the euro, potentially taking the entire bloc down with it. Even this past January, headlines went nuts when the anti-austerity Syriza party won Greece’s election, renewing long-running “Grexit” fears. Fear also abounded when Italy’s February 2013 election yielded a two-month standoff between Silvio Berlusconi, a succession of center-left party leaders and even the anti-establishment/anti-euro Five Star Movement. Italian markets tumbled and yields soared in the contest’s immediate aftermath.
But now, it seems markets and sentiment have moved on. Hysterical headlines are at a minimum Almost no one is saying this imperils Portugal’s euro membership or the euro itself. Portuguese stocks are up since the election. Yields are up, but barely—from 2.30% on October 2 to 2.54% on November 4, still very close to euro-era lows. Compare that to yields regularly above 6% throughout 2013. Eurozone stocks are up big since the election, too. Looks like markets realized one election in one country representing less than 1% of eurozone GDP lacks the power to disrupt the whole shebang—particularly when that country enjoys a strong economic recovery and has already made great strides on reforms. Unstable governments might not be able to pass many new reforms, but they can’t undo progress, either. That investors seem to see all this is a sign sentiment is warming.
We can see similar sentiment evolution throughout the world today. Take Greece, which has once again stalled out on meeting bailout conditions and is in an eleventh-hour race to negotiate with creditors over new foreclosure laws and pass a raft of legislation. They missed one deadline already and have until Monday to finish their homework and unlock the next aid tranche. In 2012 and 2013, we saw a veritable media circus every time Greece locked horns with creditors over aid disbursal. Talks regularly went down to the wire, sending yields spiking as markets feared Greece wouldn’t be able to pay its bills. Another frenzy ensued this summer, as Greece threatened to crash out of the euro with a snap vote on austerity, missed debt payments to the IMF, then U-turned and raced the clock to negotiate their third bailout before the money in the sofa cushions ran out. This time? Barely any outlets outside Greece are even reporting the delays and investors are largely saying “meh.”
In America, a debt ceiling deadline loomed last month, but even the Treasury’s customary (and wrong) warnings about impending default couldn’t make the punditry or markets hyperventilate. Sentiment was a far cry from other major standoffs in 2011 and 2013.
Softer economic data haven’t really roiled folks, either. When ISM’s manufacturing PMI hit 50.1 in October—a two-year low and just barely in growth territory (above 50)—much of the commentary centered on how the reading had probably bottomed. Other recent weakness in factory orders, industrial production and goods exports haven’t triggered recession alerts, either. Instead, pundits rationally point to stronger readings in the service sector. Even stronger services exports are gaining notice, after having gone overlooked for much of this expansion. As Sir John Templeton famously said, “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” We seem to be moving more and more into that optimism phase. While fears were elevated during late September’s volatility, we never really saw a freak out on par with earlier corrections in this bull.
Though investors are less gloomy these days, they aren’t exceedingly optimistic either, as skepticism still lingers. Many fret falling US corporate profits (wrongly, in our view), and plenty of pundits warn stocks’ recent rally is a mirage. We’re still far from the heady days when investors believe the party will never stop—that’s what true euphoria will look like. For now, blossoming optimism mixed with a smattering of skepticism is a sign stocks have plenty of room to run.