Market Outlook: Optimistic Bull vs Pessimistic Bear

Last updated: July 2020

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Bull Case

Lifted Sentiment

In the recent weeks, bullish sentiment has recovered while bearish sentiment has weakened. This helps in the case of the recovery as most of the time, the economy works on a self-fulfilling prophecy.

If enough people believe that we’re reverting back to the norm, consumer spending will increase, businesses will improve and economy will indeed recover thereby driving the bullish sentiment further up. In such an event, a positive feedback loop will be formed and the economy will indeed play out the way that people envisioned it to be – provided if there are no major hiccups along the way.

Banks have stopped hoarding

When it comes to money supply and credit, what matters is the willingness of creditors to lend instead of the quantity of money supply in the system. It doesn’t matter if there is a lot of money in the economy, when a business is in need of credit but banks are unwilling to lend, the business will still fail at the end of the day.

As such, the fact the banks are starting to loosen up and lend the reserves that they have previously hoarded from the Feds, this will help dampen the number of bankruptcies moving forward, which directly contribute to employment and economic activity.

Bear Case

Liquidity =/= Solvency

Providing liquidity in the market in a time of crisis is like providing water to a dehydrated man in a desert. Sure, it will prevent the immediate death due to dehydration but it will not cure the cancer cells inside the man.

In other words, if a company's financial health is already in bad shape before the crisis occurred, the liquidity provided by the central banks will only prevent these companies from immediate bankruptcy due to the liquidity crunch but does not address the fundamental problem that exist within them. Should the company fail to address the fundamental problems that are inherent within them, sooner or later they are still going to go down.

Illusion in the job market?

When the stimulus cease, when a resurgence of cases occurs, when business starts to fail or cut down on their headcount, that is when we’ll witness the full brunt of the economic impacts of COVID-19.

Furthermore, even for those who had indeed found employment amidst the current climate, most of them have to settle for less, resulting in a situation of under-employment and hence a lower spending power. It doesn’t matter if the quantity of employment remains the same, what matters is the quality of employment as that will directly affect the consumer spending which is the basic fuel of any given economy.

Long story short, stimulus may help keep the economy and markets afloat in the short term, but without steady job creation and income growth, there can be no actual recovery and reversion to the previous economic levels – especially so if your economy is reliant on consumer spending like the United States.

Valuations

while it is true that valuation are at a very high level due to the lackluster earnings in the midst of the COVID-19 environment, high valuations alone may not equate to future price declines.

In fact, if history has taught us anything, it is that given the same technical scenarios and valuations, a high percentage of the historical market had went on to pull large gains in the next 12-36 months as opposed to the percentage of markets that experienced a price declines.

As such, valuation is never a clear indicator for investors in a time of crisis and you should not base your decision solely from valuations alone.

Personally, here's what I think:

Regardless of bull or bear, there is money to be made with the right investment strategy and implementation. As mentioned in the book - Common Sense on Mutual Funds, for most long term investors, bull market are not nearly as beneficial, and bear markets are not nearly as damaging.

A bull market raises asset value but delivers a proportionate reduction in the prospective real yield that the portfolio can deliver from the point forward. A bear market reduces asset value, which is largely offset by proportionate increases in the prospective real yields

What matters at the end of the day is how you structure your investment portfolio and how you position your investment to derive the reward to risk ratio that best reflects your own financial situation and financial plans. This means having a long-term strategy, sticking to it and managing your portfolio regularly to maintain the right asset allocation.

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Daniel is a Licensed Independent Financial Consultant with MAS and a certified Associate Wealth Planner, who specializes in retirement and investments planning. Find out more here.

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Disclaimer:

This article is meant to be the opinion of the author and is for information purposes only.

This article should not be seen as a financial advice

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