Having published a pretty gloomy synopsis at the start of the month, but also pointed out that the world is changing very fast at the moment, I think I ought to offer some pointers to prepare readers for actions when they feel the opportunity to buy back into global stock markets has arrived.
Do bear in mind that there will not be a single point in time that is the right time to buy – there will be a change in the general trajectory of the valuation graph but it will still be bumpy. Even when there is a so called ‘v’ shaped recovery, the point at the bottom of the ‘v’ may not be that sharp when looked at microscopically.
It is already clear that we are not going to get a ‘v’ shaped recovery this time. If we are lucky enough to get a ‘u’ shaped graph to look back on later, then at the moment we are travelling along the rough bottom of the ‘u’. I am inclined to think we will more likely get a ‘w’ – in other words there is another down leg to come before there can be confidence enough for a permanent climb in valuations.
What will be the advance signs – so called leading indicators – of a recovery?
In the short term they will all be medical: news of a reliable vaccination; treatment methods (more significant in my opinion); a change in the rate of infection in Europe, the UK and the US; relaxing of lock down measures and so on.
For there to be a quality recovery, rather than just a ‘bear market rally’ the economic prognostications must switch from the absolutely dire (as now) to the ‘not so bad as we feared’.
In the short term, news of major bankruptcies, dividend cuts or even cessation, nationalisations and so on look pretty likely to me. But that may not immediately result in a sharp sell off, more likely a more gradual decline into depression.
As the market is continuing to be to some extent in denial, I suspect that we have some time to go until we reach the final ‘capitulation’ phase. But in this case, the economic news (or at least projections) will I suspect get better after the medical news gets better and markets are well known to be anticipatory.
So I recommend reading all you can manage about progress with the research and science. Understanding when that is about to yield useful results will give you your ‘leading indicator’
Mark , The markets seem to be jumping whenever there is some “new” information . In your opinion how much is this due to computers and their algorithms compared to human reactions .? Could be that they are all as confused as me !
JEFF
I think a mixture of things are driving markets up on what might be perceived as good news.
One is that many investors have only seen markets over the last 15 years or less, so they think they ‘know’ that they should buy after a sell off, based on what happened in 2008. That is a well known human pyschological bias, recognising something rapidly because it looks like what you have seen before. It can be very wrong.
Another will be the high level trading patterns of the market, some algorithm driven as you suggest and some more traditional. In times of high volatility you can make money every day on the market if you can act quickly to follow the momentum.
Then there is the wishful thinking factor – we all are now longing for this crisis to be over and it is tempting to take very small changes that are not exactly positive, but just less negative, as being a indication of a turnaround.
The way to assess the situation is to ask are the fundamentals better? Not to just ask if shares are cheap. They are cheap on some measures, but they could be a lot cheaper yet. Fundamentals are things like global economic growth, government and private debt, merger and acquisiion activity, consumer and business confidence index numbers, dividend growth prospects and the price of oil. On every one of those measures, things are getting worse.
I wrote that the medical evidence might be a good ‘leading indicator’. The recent rises in the market suggest some people are using crude news headlines as the ONLY indicator. That is not such a surprise. It is tempting to think that the big players in the investment markets are gurus of some sort but in truth they are just another set of human beings like you and me and make all the same mistakes.
So, I am bemused by the recent market pick up on logical grounds, but not in terms of human behaviour. Is it solidly based? Not in my opinion.