There has been endless speculation about the kind of rebound the US economy will have. Will it be a rapid V-shaped recovery, or a long period between decline and subsequent recovery (a U-shaped)? Other possible forms of recovery have been compared to the letters "W" and "L".
In reality, this alphabet soup “ultimately matters very little,” according to Vincent Deluard, head of global macro strategy at investment firm INTL FCStone. In an email, he said that investors should not be discouraged by this, because, he notes, "economic forecasting, a dangerous exercise at the best of times, is even more useless today: we have no idea whether there will be a second wave of infections or not, inflation or deflation, a balance sheet recession or a debt jubilee, etc. »
Therefore, knowing that the forecasts do not differ much from our investment strategies should be reassuring. In any case, the coronavirus recession may already be over, but it is a long ascent toward "normalcy."
GDP this quarter
Deluard reached his counterintuitive conclusions when calculating the return for a hypothetical investor who was able to predict what the final GDP figure would be four quarters in advance. This involves an incredible level of clairvoyance, of course, since it is long after a certain quarter has ended that the government reaches the final GDP figure for that quarter.
However, Deluard found that this hypothetical investor, despite possessing incredible clairvoyance, would have barely outgrown a simple buy-and-hold strategy over the past seven decades.
In particular, he assumed that this investor would be 100% invested if GDP growth in the following four quarters was faster than in the current quarter; otherwise, you would invest in cash. Since the late 40s, this investor would have outperformed the S&P 500 SPX, +0,43% by less than one percentage point annualized. That's a very small reward for being a perfect tipster, especially since the odds are staggering that our forecasts will fall far, far from perfect.
Consider what Deluard's findings mean for our current uncertain situation, in which we don't really know how fast the economy is growing. But we would have very little advantage over our fellow investors even if we knew now that economic growth will accelerate in the second quarter of 2021.
Why does knowledge of the future growth rate of the economy matter so little? Deluard argues it's because profit margins and P / E ratios matter so much more. The economy may be growing at a rapid rate, after all, but if profit margins are shrinking that growth will not translate into increased profits. And fast-growing earnings can't always outweigh a decline in P / E.
Future earnings of companies
This excessive role played by the P / E ratio is related to the discount rate that investors use - explicitly or implicitly - when they value the future earnings of companies. With a high discount rate, profits in future years mean relatively little to a company's current valuation. With a low discount rate, they matter much more. In fact, Deluard recently showed that, depending on the discount rate used, the S&P 500 is now fairly valued at between 1.851 and 3.386.
Not surprisingly, as Deluard put it, knowing in advance the rate of GDP growth is "remarkably useless." None of this is to say that the economy doesn't matter. It does matter, of course. But your impact is greatest when you focus on the long-term stock market. In shorter periods, the economy plays less of a role than profit margins and discount rates tied to valuation.
This discussion also puts into perspective the recent debate about the apparent disconnect between the stock market and the economy. What Deluard's research shows is that this disconnect is neither new nor particularly greater now than in years past.
Investors expect a quick economic recovery as the NASDAQ 100 hits a new high and the S&P 500 eliminates annual losses. The benchmark S&P 500 index fell nearly 34% from February highs to March lows, pushing markets into bearish territory. Rising tech and communication stocks have boosted NASDAQ earnings, with companies like Zoom nearly tripling its share price since early January as the lockdown forced consumers to embrace new forms of communication.
The new bull market was confirmed just 16 weeks after COVID-19 fears saw investors sell off their assets when a recession in the United States was feared.
The NASDAQ is up 44,7% from its March 23 bottom. A bull market is generally considered to be a rise of more than 20% from the lowest point.
BetaShare chief economist David Bassanese believes markets could be overly optimistic having overshadowed previous highs.
Ultimately, I suspect that markets will be overly optimistic about the speed of the economic recovery, but markets are ultimately driven by the daily news flow, which has remained generally encouraging since they were put in. global closures are underway, "he said.
Negative economic data
"After all, the market had effectively discounted the negative economic data related to the lockdown during the sale in March, and was therefore immune to this data when it started to appear in recent months," explained Mr Bassanese.
As the economy begins to reopen, the economist argues that a clearer picture of the economic outlook will have an impact on the stock market.
“The market has been able to focus on the benefits of the closes in terms of flattening the curve, gradual reopening and now some early signs of a rebound in the latest economic data. But the challenge will come after the initial bounce in post-reopen economic data, if the post-reopening data is much more subdued, as I think it will be.
"The market is likely to continue to act as if there is a V-shaped rally until there is clearer evidence to the contrary," continued Mr Bassanese.
A major boost for the market was Friday's monthly employment report, which showed an unexpected drop in the unemployment rate, reinforcing views that the worst of the economic damage from the virus outbreak was over.
Stocks that had previously been hit the hardest by the shutdown, including transportation, tourism and the retail industry, have risen as investors turn optimistic about a restricted post-COVID-19 world. "What is clearly happening is that the excitement of the reopening is allowing many of these businesses that have been victims of COVID-19 to come back and go back into force," said Stanley Druckenmiller, President and CEO of the Duquesne Family Office. , to CNBC.
However, Mr Bassanese cautioned Australian investors to be cautious and patient when investing in the US market.
“I still think it's time to be cautious, especially if you haven't bought into the recent equity rally in a major way yet. The fear of missing out is now intense, but I suspect a decent pullback may take place in the coming months - at least half the rally since late March - as the reality of a moderate economic recovery becomes apparent, " Mr. Bassanese.
Strong international results have boosted domestic stocks, and the Australian market is up 2,48% at press time.
Bearish trend in the stock market
Investors are markedly bearish, with 75% anticipating a U- or W-shaped recovery from the economic fallout of the coronavirus pandemic, compared to just 10% expecting a V-shape, according to the latest manager survey. Bank of America Global Fund Fund. A second wave of coronavirus is by far the biggest tail risk, with 52% of managers surveyed citing it, while permanently high unemployment (15%) and the disintegration of the European Union (11%) occupy second and third place.
Managers dismiss sellers' concerns as US stocks approach the highs of the tech bubble. The cure must be no worse than the disease
Multi-manager funds reduce equity exposure to the lowest level. Cash levels have fallen slightly to 5,7% from 5,9% in April, but are still well above the average of the last 10 years of 4,7%, indicating that a "Buy signal" is a counter bet.
In keeping with this "extremely bearish" investment, the respondents are underweight cyclical assets, such as energy and industries, and are overweight defensive assets, such as healthcare, cash and bonds. The value versus growth argument has returned to pre-global financial crisis levels, with 23% net of investors believing that the stock will underperform growth, a figure last seen in December 2007.
Investors' opinion
A net majority of managers (63%) said companies are over-leveraged, supporting the view that investors want companies to spend their cash on improving balance sheets, with a net 73% expecting this, while 15% want a capex increase and 7% want the cash returned to shareholders.
The euro looks cheap to respondents, with 17% net suggesting the currency is undervalued, while 43% net believe the dollar is overvalued, although exposure to US equities remains 24% net overweight while Eurozone equities are underweight (17% net), their lowest allocation since July 2012.
Despite this, the UK was the most underweight region in this month's survey of global fund managers, with a net underweight of 33%. While on the other hand it must be remembered that the reordering of the supply chain, the increase in protectionism and the new forms of higher taxes, occupy the first place in the lists of investors on structural change in the post-Covid world , cited 68%, 44% and 42% of the time respectively.
Debt waivers, green energy, stagflation and universal basic income also feature on this month's list of likely post-pandemic changes.
Savings on commissions
Especially investors who carry out many operations a year, both aimed at the short, medium or long term, can take advantage of the flat stock market rates that are beginning to market more and more financial institutions and, which allow significant savings in terms of commissions for operations performed. Its rate is between 6 and 10 euros per month, and for a person who carries out a total of four operations per month, for example, the savings can mean about 30 euros per month on average, which also helps to optimize the investment . The flat rate on the stock market allows the user to carry out as many buying and selling operations as they want, as is the case with telephone or Internet rates. Although its application is not very widespread in the financial sector, it mainly covers banks and savings banks that operate through the Internet and brokers, both national and international, which are the ones that provide the best conditions.
In any case, it cannot be forgotten that a good purchase on the stock markets means making a lot of progress so that the results in the form of capital gains do not take long to arrive, but for this it is necessary to take a series of guidelines and also precautions with the aim that a bad position taking can weigh down our investment in the future, even at the cost of developing in a bullish period.
Before taking positions in a security, it is advisable to study its technical and fundamental aspect, not to leave it to a random choice that can only bring problems towards the interests of small and medium investors, mainly in the form of handicaps.
Entering the right sectors simplifies the selection task when building a portfolio, as it will likely capture positive market sentiment, whatever the bet chosen, as long as the fundamental data of the companies is positive.
In upward trends, a very common rule among the most experienced investors is to wait for cuts in the prices of companies to enter the market at more competitive prices, which can lead to a greater upward trend in the price. value and, therefore, greater possibilities of revaluation. These specific cuts occur when there is a certain "fatigue" in the buying positions and sales begin to float, that is, when the market is overbought and needs an adjustment in prices to continue its upward climb. These "breaks" in its price quotation, in which sales begin to emerge, occur several times during a bullish process, even the stock market analysts describe it as "completely healthy market movements”That serve for the indices, sectors or stocks to gain more strength in the next trading sessions. They are especially suitable for those investors who are targeting the shorter term and want to get all their "juice" from the upward movements experienced by equities. On the contrary, they have little effectiveness for those who choose their investment towards the medium and long term since their repercussion will not be as effective.
Buying stocks close to their support prices: Through the charts it will be possible to check the values that are in this situation, to later sell them in the resistance zone, or also in the event that the supports are broken. It is one of the simplest strategies that are used in the stock market, although for this it is necessary to keep a timely follow-up of the evolution of the prices of the possible candidates that may be part of the securities portfolio.
Securities that have hit bottom: It is one of the ideal scenarios for any investor who has to deal with purchases, although it has the serious disadvantage that it is very difficult for retail savers to discover this exact point and they must be helped by the analyzes carried out by the main intermediaries or brokers financial, which are published in the specialized media. Before taking positions in a security, it is advisable to study its technical and fundamental aspect.