With the vaccine rollout, the markets has high hopes for a successful and on schedule rollout of the Covid-19 vaccines globally, anticipating a majority of people having been immunized by July. If delays comes around we could be in for a stock market pullback.
Geopolitically, there are mid-year presidential elections in Iran where we could see a hardline conservative come to power, hampering any US attempt to return to the Joint Comprehensive Plan of Action to contrain Iran’s nuclear ambitions. President elect Biden has made it clear he won’t be easing trade tariffs immediately and intends to confront China on environmental and labour issues in addition to intellectual property. We can also expect renewed tensions between North Korea, Russia/Syria, Venezuela and others with interests in conflict with US goals.
Premature monetary or fiscal policy tightening in major economies could slow the recovery and deal a setback to the stock market. This is what happened when the global economy emerged from the last recession in 2010 and 2011.
Lingering structural economic impacts from the 2020 crisis and recession could slow the economic rebound. Instead of a quick return to the pre-crisis economy, it is possible we may need a longer period of structural adjustment. Continued easy fiscal and monetary policy could also result in a drag on productivity and growth from the hordes of “zombie” companies. About 20% of US and non-US companies are considered “zombies”, defined as those with income insufficient to cover debt payments. These companies are being kept artificially alive with government aid.
Last, an unexpected jump in inflation, surprise surge in bond yields or plunge in the dollar might lead to higher stock market volatility. Don’t forget that inflation expectations have been rising fast the last couple of months.
What are the markets telling us?
The market broke out to new record highs, signalling higher highs ahead. Note that all of the stock indexes are clearly bullish, well above their 65 week moving averages.
Plus the fact that they are all at new record highs reinforces solid renewed strength across the board that will likely continue.
Ok, but what about the wide divergence between Wall Street and Main Street, the vulnerable economy, the new record Covid highs, business closing, many unemployed and so on?
While this is all true and the disconnect continues, there are two things we have to remember that were strongly reinforced this past month…
First, easy money has overpowered everything else. It’s been driving the market higher. That’s what the market’s focused on and it’s thriving in this environment. We have so much debt now, the markets are in such a massive bubble that the Fed would not dare risk pricking it. The Fed is not going to take away the “punch bowl”. (Peter Schiff)
Second, the vaccine news has also fueled optimism. Keep in mind, the stock market always look ahead. So perhaps it sees better times coming, say six months down the road. This in turn is also helping to boost stocks higher.
Basically, all foreign markets are generally rising for the same reasons as the US market. They like the stimulus, they are optimistic about the vaccines and they are happy the political situation has settled down. Do not forget, the markets like stability and here too, they seem to be looking ahead.
So in conclusion: Focus on time in the market – DO NOT TRY TO TIME THE MARKET
Analyst Nucleus Group