REUTERS/Eloy Alonso
Children run from the Fire Bull, a man carrying a metal structure shaped as a bull's head stuffed with fireworks, at the San Fermin festival in Pamplona July 8, 2014.
The argument is essentially: All of the fundamentals, including an improving economy, and low volatility remain in place. Nothing has changed that would derail the market.
We accept such correction risks, but see only modest near-term downside that may anyway be quite difficult to trade, as the fundamentals behind the rally in stocks are to us largely intact. Low implied volatilities make it relatively cheap to hedge such downside, though. The fundamentals we focus on remain the lack of any return on cash and generally low market and economic volatility. Incoming economic data and surveys are raising our confidence that global and US growth is set to rebound to a 3% handle in H2, after a dismal and unexplained weak H1. The major first GDP report for Q2, China, came in just above our expectations, reducing fear on the downside. Forward looking PMIs suggest a strong Q3, even as we accept that this signal has not functioned well so far this year. Q2 earnings reports are also coming in well above expectations (see equity section below).