Bull markets, bubbles and Swiftonomics

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness,” Charles Dickens famously wrote. That aptly captures the dislocation between political events and market action as we go into the next week.

The U.S. government shutdown has stoked worries about its adverse impact globally, but it does not seem to have dampened the risk-on sentiment across major equity markets. The political deadlock in Washington, D.C. looks set to continue into next week, with concerns the Trump administration could use the funding freeze to permanently slash roles and cancel certain projects.

While there has been much research on what an extended shutdown could mean for stocks, major U.S. and European indexes have been notching record highs. That comes as fund flows data from the Bank of America shows $26 billion moved into global equities during the week ended Oct. 1, with a record $9.3 billion going into the technology sector.

But amid this optimism, another narrative is growing. An increasing number of market participants are warning that bubbles are forming in parts of the market, with some saying this could lead to a larger market correction.

Saxo’s warning is “don’t predict, prepare.” In a recent note, the bank said “the mood could hardly be more conflicted. Equity indices hover near record highs … yet consumer sentiment remains close to historic lows,” encouraging investors to diversify to protect against instability.

There are red flags in the credit markets in particular. Barnaby Martin from Bank of America told “Squawk Box Europe” their recent survey showed credit investors have one of the “biggest overweights ever in the 20-year history” of that survey, warning there were increasing concerns about market bubbles.

Last week, U.S. car parts manufacturer First Brands filed for bankruptcy after revealing a $12 billion debt pile through the use of off-balance sheet financing. Famed short-seller Jim Chanos told the Financial Times he “suspects we are going to see more of these things,” warning the increasingly expansive private credit market has echoes of the subprime crisis.

A bubble that does not seem at risk of bursting is the one formed around multi-award-winning pop star Taylor Swift. Her latest album “The Life of a Showgirl” was released worldwide on Friday following months of anticipation for fans. It follows her record-breaking Eras Tour that topped $2 billion in ticket sales alone.