The World Is a Mess. Markets Are Ignoring Those Risks—for Now.

Klarna Group, which describes itself as “a global, AI-driven” payments platform, had its initial public offering this past week. (Michael Nagle/Bloomberg)

Dr. Pangloss, welcome to Wall Street, where it is indeed the best of all possible worlds.

Voltaire’s oblivious optimist fits in well in a place where domestic political violence and escalating global tensions don’t intrude.
And so major equity indexes notched records again in a week marked by an abhorrent assassination in the U.S. while Russia sent drones supposedly intended for Ukraine into Poland and Israel expanded the Gaza war into Qatar. As Peter Atwater observed in his Financial Insyghts missive this past week, it isn’t known if Chinese President Xi Jinping might tag along with an assault on Taiwan or India’s Prime Minister Narendra Modi could up the ante with Pakistan, but global markets have priced in none of this.

Stocks’ advances in the face of these risks may mainly prove President Calvin Coolidge’s observation that the business of America is business. Even if the U.S. economy is slowing, it is still growing, and profits even more so. As noted, stock and bond markets also continue to advance in expectation of a new round of Federal Reserve interest-rate cuts, even with quite easy financial conditions. That’s evidenced by corporate credit offering slim yield premiums, which sent the popular iShares iBoxx $ High Yield Corporate Bond exchange-traded fund (ticker: HYG) to a 52-week high this past week.

Among equities, along with the S&P 500 and the Nasdaq Composite ending the week at new high marks (and the Dow Jones Industrial Average setting a record on Thursday), the market for initial public offerings is back. A highlight was the debut of Klarna Group, which, as Macro Intelligence 2 Partners helpfully explained, “for those of you who don’t finance your Chipotle burritos,” is a popular buy-now, pay-later service. That Klarna describes itself as “a global, AI-driven” payments platform makes its $31 billion market capitalization easier to explain, they wrote in a client note.

Klarna was followed by Figure Technology Solutions and Gemini Space Station, both crypto-related outfits that popped following their debuts. “We assure you that the reopening of the IPO window isn’t usually considered a symptom of tight financial conditions,” MI2 dryly added.

Despite that, the Fed will be easing this coming week, which will only be the ninth time it has cut rates within 10 days of the S&P 500 hitting a 52-week high since 1994, according to Bespoke Investment Group. It would also be only the sixth time the Fed has cut since then after a pause of more than six months between rate reductions. In either scenario, the advisory found the S&P higher a year later with bigger gains than the 12-month median return.

Based on that history, equity investors can safely ignore domestic political risks, international tensions, richly priced bonds, exalted equity valuations, and signs of speculative fervor in the IPO market. And with the Cboe Volatility Index, or VIX, the so-called fear gauge for stocks, trading below 15 and evincing no worries among options trades, could Dr. Pangloss actually be right? Or does complacency reign based on expectations of continued easy money?

Write to Randall W. Forsyth at randall.forsyth@barrons.com