Co-produced with Beyond Saving
I have been getting asked a lot of questions about the state of equities, and most notably why equities have been rallying so much recently. There are several reasons for this which include:
- The markets are forward looking and they have been rallying in anticipation that the economic shutdown is gradually easing.
- Furthermore, central banks have been providing enormous levels of stimulus and unprecedented liquidity actions. This liquidity suggests that it's highly unlikely that we will retest the lows seen earlier this year. So the worst of the market pullbacks seems to be well behind us.
- There's also huge amounts of cash sitting on the sidelines, either invested in bonds or in deposits. Due to lack of other opportunities (notably due to slowing growth), this money will eventually find its way back to the equity markets and push the prices much higher.
- Historically, when the Federal Reserve increased money supply, such as all the economic boost that is being done now, the equity markets have strongly outperformed in the following 12 months. So I'm very bullish on the medium- and longer-term outlook of the stock markets.
All of the above is great news, and there's a lot of tailwinds for the markets to eventually recover. However this does not mean that the path to a full economic recovery is near. This will not happen until a vaccine is in place, which would mean that return to normalcy and new market highs are unlikely to happen until the year 2022.
Therefore we believe that the economy is unlikely to see a "V" shape recovery, but rather an elongated "U" recovery. With such a scenario, the markets are likely to continue to be volatile in the shorter term.
Income investors are faced with the prospect of where
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