• Tim Alford

Rally Forever or False Dawn?

Investors have reacted to the passing of the first phase of the corona virus pandemic and officials' supportive monetary response by bidding many asset prices back to near previous highs. The question is will this continue, be sustainable, or be transitory.

There are two important related concepts.

Economic fundamentals in terms or production, growth, and corporate profits are in direct opposition to asset prices. They have deteriorated substantially. Though they've bounced somewhat, the outlook is for growth and profits to be down substantially. For the moment, investors are completely looking through and assuming a resumption to pre-virus levels and growth very quickly. There is substantial debate on the speed of recovery, with some economists forecasting a much weaker and slower recovery. If so, this will test investor sentiment, the main determinant of short and medium term market action.

The second pillar of market support is central bank and government stimulus that has been put in motion. While these amounts are extremely large, the math is they're so far actually smaller than the economic hit from sheltering in place and similar actions. They have certainly, however, created impulse to propel asset prices higher. If markets falter, it's likely officials will expand such policies.

It is extremely difficult, yet thought to be vitally important for investors to decide what will win out: an amazing economic recovery justifying current prices, further government stimulus creating such a recovery or successfully pushing sentiment to keep buying assets regardless, or a significant move down in asset prices to catch up with fundamentals. If one takes a historically-informed perspective, the answer is clear. Every time similar has occurred, asset prices have retreated. No exceptions. Which means those expecting any other outcome should have good reasons why this time is different, in the face of what can only be described during a global pandemic and prolific social unrest as an extremely negative landscape.

Another alternative, seldom discussed, would be for investors to forget about watching and keeping up with "the market" and focus on selecting independent opportunities with merit in terms of value and opportunity. Just an idea.

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