Boil That Frog! Are U.S. Investors in Hot Water?

On a day when the Dow Jones Industrial Average has gained nearly 100 points, one investment bank is warning that U.S. investors are like the proverbial frog in a pot of boiling water--and don't feel the heat rising.

Sure, the S&P 500 has risen 0.2% to 2582.77 at 12:58 p.m. today, while the Dow Jones Industrial Average has gained 86.35 points, or 0.4%, to 23,444.59. The Nasdaq Composite has ticked up 0.1% to 6,786.92. In other words, there's little sign of an imminent threat to the bull market that begin in 2009.

So what are Société Générale strategist Sophie Huynh and team seeing that make them write that "today's current dynamics put the US equity market at a similar risk as the frog?" I'll let them explain:

The parable of the boiling frog refers to how a frog in a pot can get slowly boiled alive without even realising it. The frog is so comfortable as the water gradually warms up that it is unaware of the danger it faces and ends up cooked. The current dynamic in the US equity market seems not unlike this cautionary tale. In a goldilocks scenario of low interest rates, abundant liquidity, stable growth and a focus on the “good” Trump, investors continue to push asset prices, volatility and leverage to historical extremes. Yet, a low volatility carry environment with rather extreme positioning is a dangerous combination, which we recently likened to dancing on the rim of a volcano.Over the next 12-18 months we do not expect the market to crash or a financial crisis to ensue. However, we believe that the S&P 500 is trading at levels that discount an asymmetrical risk/reward profile (click here for more) and flat price movement from here on out. But we also think a bear market is not so far in the distant future though, as we forecast a decrease in the S&P 500 to 2000 by end-2019. Yet, as we write this report the S&P 500 is at 2585, up 15.4% year-to-date; there is little sign of momentum abating, with record highs seen every month this year except April. Although Trump has barely delivered yet on his campaign promises after almost a year in the White House, we have seen more of a focus on the “good” Trump benefiting from the strong economy (and likely also vice-versa). The “bad” Trump has been limited for now to negative press attention. Does all this signal investor unwillingness, or an inability, like the frog, to perceive the threats?

Despite the scary headline that SocGen through on the note, does this sound much different than the consensus right now? I'm not so sure it does. Ask nearly everyone, and they'll tell you that were in the latter innings of this bull market, if only because it's been going on for so long. The big difference here is one of degree--a flat S&P 500 for a while before a crash to 2,000, a 23% drop from here.

To which I ask: Is that all?

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