What The Second Half Holds For Markets

What The Second Half Holds For Markets

over 3 years ago2 mins

The year is already half-way done 😱 After a stock market tumble of unprecedented speed followed by an equally aggressive rebound, it takes guts to make predictions about what the next six months might have in store for investors. But here comes European investment bank Nordea to give it a go...

What does this mean?

Nordea, in a report on Friday, painted a fairly optimistic picture for riskier investments like stocks. Firstly, they pointed to the “balanced” way investors have assigned money to stocks – showing less fear than in the spring but also less bullishness than before February’s market tumble.

The bank also forecast continuing “V-shaped bounces” in economic data that rely on sentiment surveys – like Purchasing Managers' Indexes – in July and August, along with some “massive” jumps in hard data like economic growth. That may convince investors that company profits are due for a rebound, something which has historically coincided with climbing stocks – even if their valuations look pricey.

Earnings per share (EPS) are forecast to rebound
Earnings per share (EPS) are forecast to rebound

As summer fades into autumn, however, economic sentiment might sour as jobs data remain weak and companies continue to go bust. Nordea also warned that “circumstances are not normal” and stocks are trading at higher valuations than in typical recessions. With coronavirus still circulating, the outlook is unfortunately rather “blurry” 👓

Why should I care?

As is often the case, Nordea reckons that the bond market dog is wagging the stock market tail. As the so-called real yields on bonds – the nominal bond yield minus inflation – slide ever further below zero, investors are being pushed to riskier assets like stocks for returns.

Keeping it real(ly low)
Keeping it real(ly low)

Nordea forecast that this trend of lower yields will continue for some time yet, with central banks highly unlikely to let yields tick up while the economy is so weak and the threat of deflation ever present. With bond returns having already trounced stocks in 2020, could stocks eventually catch them up? Or might central banks ease back their support?

Follow the leader?
Follow the leader?
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