Market prospects? Binary outcome
Chief Economist & Fund Manager
Analyst Insights, Monday, 13th of July, 2020
What could be the direction of the markets in the upcoming months?
There are too many variables to consider and most of them are binary. This means that a variety of outcomes might happen, and most of them have little to do with the market and economic forecasting.
First of all, markets are currently being supported by fiscal and central bank stimulus that offer downside protection. On the other hand, valuations are more than stretched, which means any further upside is probably limited, especially given the resurgence of COVID19.
And as for COVID19, the issue at hand is not if we see total lockdowns, but how long we will be on the edge until the problem is over.
A COVID19 vaccine should be positive, but we don’t know when and if it will be available. Remember Aids is also a virus, and after all these years we still do not have a vaccine.
But assuming we do get a vaccine, we don’t know how markets will react. While most think it might be positive for markets, it might turn out a sell the news type of event.
With valuations already stretched, can he multiple continue to expand to infinity? The answer is no, but we don’t know from what point markets might decide to correct. Again, this is binary.
If investors roll over to other sectors out of technology could prevent markets from falling, but we don’t have any evidence of this so far.
The bottom line is that it is difficult to make any kind of prediction of what markets will do because valuations are more than stretched, COVID is still with us, we don’t know when we will get (and if) a vaccine. All these outcomes could be positive for markets but are random and not predictable.
the S&P 500.
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