By Peter Lundgreen,
The global stock market received a huge hit since mid-February and the following weeks, though the rising fear has now calmed down among most investors, as Wall Street has stabilised. Although I do have quite a few investors who are cautious, and ask about what there is to expect from the financial markets for rest of this year? So maybe, it’s time just to share the most important thoughts with my current expectations.
Basically, the abnormal amount of liquidity that has flooded the financial system since the global financial crisis has led to ever-increasing prices on all kinds of assets. That story is well known, but also incredibly important, as price increases are not necessarily rooted in improved corporate performance or an improved quality in the fixed income market. In my opinion, this particular situation will lead to increased stress among investors, which is expressed as nervousness and increasing volatility within all asset classes.
That’s what we’re experiencing now, but this does not mean it’s the end of the world, just that life as an investor does not offer eternal rising prices. This is what I perceive as a normal market, though of course, it makes the management of investments more demanding.
What I consider to be the “global base scenario” is intact, which includes the forthcoming huge economic growth packages in both the EU and the US. The two economic stimulus packages will work very differently, but both are aimed to spark GDP growth. I still expect that consumers have postponed larger purchases of durable goods, cars, etc., which will be triggered once the virus is under control. Moreover, there is no prospect for central banks to change the extremely loose monetary policy.
The economic stimulus packages and the expectation of an end to the Covid-19 crisis already led to rises in the stock markets last year. However, both myself and the stock markets had much too high expectations about how quickly the vaccinations would be completed in the major economies. Last year, my belief was that by mid-2021, that process would be complete in the Western world, as well as in China. Though this development drags out, it does not change the “global base scenario”, but it may lead to more corrections in the market.
The fact that virtually all shares have risen in price due to the overall optimism probably also leads to an increased number of corrections for another reason. This is simply because we do not know yet how everyday life will finally be when the virus is under control. Put in another way, I can well imagine larger sector shifts in the stock market throughout 2021, depending on whether everyday life changes or shifts back towards the direction of life before Covid-19.
The current discussion about inflation, which is taking place in the financial market and among certain economists is interesting. Rising inflation is the explanation for the drop in the stock markets from mid-February and 3 weeks after that, but in my view, the sell-off is more of an expression of the initially mentioned increasing nervousness among investors.
Last year, the US 10-year interest rate fell to a level of around 0.65 pct. for a period, which expressed the crisis, but inflation had also dropped to 0.5 – 1.0 pct. Since then, inflation has returned in the United States, and the American 10-year yield is often at a level higher than the inflation.
This means that the real interest rate is positive, which is healthy for the economic climate, so as an investor, one should regard this as a good development. I could therefore very well imagine that the 10-year US treasury yield continues up to 1.75 pct., which is higher than the current level at around 1.65 pct. The market is almost there, but nonetheless, I expect a continued nervousness in the financial markets during the coming months, though I presume that the high nervousness level will be waning.
The biggest risk that I currently pay attention to still is different than the main focus in the financial markets. The inflation will rise, but I don’t expect it to increase too much, though if the virus continues to mutate faster than new vaccines can be developed, then investors could start to fear about the future again– this remains a current risk that I give attention to, though understood as it is, not my main scenario, but remains to be the most overlooked risk at the moment.
Peter Lundgreen is the Founding CEO of Lundgreen’s Capital. He is a professional investment advisor with over 30 years of experience and a power entrepreneur in investment & finance. Peter is an international columnist and speaker on topics about the global financial markets.