Due to the volatility experienced during this year, there are so many different voices and predictions about the stock market out there. Some predict that we are in a stock market bubble and that we are going to experience a stock market crash of apocalyptic dimensions in the upcoming months or years. Others believe, that we will enter the next stock market cycle, with incredible gains in the mid- to long-term. I personally do not believe in another crash, but am aware of further corrections ahead of us. This depends on the timeframe we are looking at and thus I would like to share my personal short-, mid- and long-term stock market outlook with you.
Uncertainties are a deadly enemy for the stock market. The more uncertainties there are, the more likely it is, that we will see higher volatility in the markets and bigger drops or even a crash, as investors start to question the current valuation of companies. But what are the potential causes to initiate such a scenario?
First, there is the pandemic. We are now entering the cold season of the year, and as expected we are seeing higher infection rates again. Some governments are already taking actions and introducing restrictions for public life.
Daily confirmed new cases (7-day moving average)
But are we going to experience another economic lockdown as in March this year? I don’t know, but personally I don’t expect that. Another lockdown would finally kill our economy and would lead to even more drastic effects, as we have seen already, and I think governments are aware of that. I assume, it is more likely that there will be more local restrictions, depending on the overall development of the pandemic. The good news is, that developments for vaccines are making great progress and that we probably will see the first use of such during 2021.
According to my understanding, the markets are aware of that already and thus the recovery of the economy is already partly priced in. At least, that would explain why the markets have recovered at such a fast pace, after the drop in March (of course besides the stimulus payments). But nonetheless, I believe the release and use of a vaccine at a bigger scale could trigger another stock market rally, as uncertainties about governmental restriction for the economy will once and for all be taken of the table.
Why? The gains in the stock market, e.g. of the S&P500, were mainly driven by big tech companies, e.g. like Apple, Amazon or Microsoft. These companies were not really affected, or even benefiting, from the situation beginning of this year, while a lot of stocks still show negative returns year to date. But as soon as a vaccine will be released, people will be able to get back to normal again, work, go out, and travel without further restrictions. The outlook for an economic recovery drastically improves for these companies “left behind”, which will attract retail investors once again.
Indeed, it seems that bad news about the worsening situation and governmental restrictions did not have that much of an effect on the stock market recently. But why did we have another correction in the markets beginning of September this year?
United States elections
First, it is obvious that profits are being realized, after the recent gains between March and August this year, this is normal and to me the correction seems to be healthy and proportionate to the gains. But second and more important is the upcoming election in the United States of America. The election in the U.S. always has been a great factor for uncertainties and volatility in the markets. Who will be the next president? Will Donald Trump stay in office? Which actions will be taken by Joe Biden to support the economy, if he will be elected? How does this affect the economy in general?
History has proven, that the markets tend to drop starting from August / September during an election year due to such uncertainties, while volatility increases more and more until the end of October. This is what we are seeing right now, and it totally aligns with the bigger picture. So, what can we expect in the upcoming weeks considering that? I do expect more volatility and further corrective moves, especially in the week before the election, but a broader recovery soon after the election, independent from whom will be elected. Due to that, the election does not influence my current investment strategy in any way and I will continue investing my money monthly.
The next stimulus package
But there is a more important topic to consider, stimulus payments. The stock market currently is addicted to these payments, like a body builder to steroids. These payments keep the economy and the stock market up and running. Due to the high unemployment rates, especially in the U.S., many people fully depend on these payments and are not able to earn their monthly income by themselves anymore, for sure a critical development. Thus, the markets react very volatile to any news that promote uncertainties about further stimulus payments, or a delay of such.
On Tuesday 06th October president Trump announced via Twitter, that further discussions and negotiations about the next round of stimulus payments will be halted until after the elections in November. Although the markets started positive this day, after the tweet they immediately took a hit and dropped more than 2% in a matter of 2 hours. This shows how sensitive the markets react on that and how dependent they are on further stimulus payments.
Even tough, negotiations were delayed, I am fully convinced that the next package of stimulus payments will be released very soon. In addition to that, I am sure that we are still at the very beginning of such payments and money printing. Jerome Powell, the chairman of the Federal Reserve, announced several times, that they will do everything necessary and possible to support the economy in the current situation – a license for unlimited money printing. We have not seen many companies to file for bankruptcy yet, and I am sure that governments will support bigger corporations to avoid further unemployment of their citizens.
It is sad, but a lot of small businesses will lose out in this case. They will not be supported accordingly and will go out of business, providing even more opportunities to big corporations, that will take their market share and thus grow even bigger. Following that, my investment strategy will be mainly focused on big corporations, with sustainable business models and good equity capital, basically companies that are in great health or that are too big to fail.
But what does the unlimited money printing mean for fiat currencies?
If you take a close look on the U.S. dollar currency index (DXY), you will see that the value of the U.S. dollar has been following a downward trend channel for many decades now. The value of the U.S. dollar is constantly depreciated and is close to the upper trendline of the trend channel currently. Thus, I fully anticipate that the U.S. dollar currency index will turn over and fall until it reaches the lower trendline of the channel again. It has been following this cycle for many decades now. Especially the current set-up, between the 100-day moving average (orange line) and the 200-day moving average (red line), supports this theory. Indeed, the current set-up is identical to the ones during the crash of the DXY in 1985 and 2002 (yellow circles).
U.S. dollar currency index
Following that, in the long-term the U.S. dollar, and other fiat currencies, will continue to lose more and more of their value. In addition, stimulus payments and money printing will even accelerate this process, and there is no sign of a trend reversal visible at all. But why are we not seeing high inflation rates yet? Because money velocity is at an all-time low currently.
Velocity of M1 money stock
Although money is printed massively, it mainly flows into assets right now, e.g. stocks, big corporations, precious metals, real estate, or cryptocurrencies, but is not yet used to buy goods or services. We are even seeing a tendency to a deflationary phase right now. Due to economic restrictions people earn less money, which leads to the fact that less money is spend to go on vacation, buy a new car, to just go out on a diner, or on daily living expenses. This increases competition between companies and pressurizes their price policy. But at some point, we will see printed money entering the market again, increasing money velocity and leading to higher inflation rates for goods and services. Maybe this will be the case, when a vaccine is released and people get back to normal again.
Considering the long-term view of the DXY, I fully anticipate that the U.S. dollar, and other currencies, will continue to lose their value, additionally accelerated by money printing and stimulus payments. I think we are entering a phase of asset price inflation, at some point maybe leading to an asset bubble. This means that all kinds of assets long-term will move in parallel and increase their price. We have experienced that already during March when stocks, precious metals and cryptocurrencies, all at once, crashed and lost value, and afterwards started to regain value again in parallel. Even prices for real estate further increased during this year besides the current uncertainties. Everything seems to be tied together at the moment and we saw similar behavior during the market correction beginning of September again. Will this behavior continue forever? I don’t think so and believe that at some point in time gold and Bitcoin will decouple from the markets again, with the potential to outperform the stock market in the future.
Dow Jones vs. Gold / Oz vs. Bitcoin
Considering the long-term depreciation of fiat currencies, I think it is a good idea to not save all money in a bank account and just wait for it to lose value. I personally invest my money into different asset classes and diversify to be prepared for different scenarios.
Are we in a stock market bubble already?
Recently I read a lot about that we are in a stock market bubble, which is going to burst. But I do not believe in that and there are two reasons for that. First, if you look at the Wall Street Cheat Sheet, it tells us that prior to reaching the top of a bubble, people will go nuts about the stock market. Everyone will make money and people will quit their jobs to go all-in, because it will be too easy to make money in the stock market. People will believe, that the markets will continue to rise forever. Some will even borrow money to invest it in the stock market. Do we see such a behavior already? No, not at all. A lot of people are still waiting on the sideline, watching patiently and believing in a crash. From my point of view, there is too much fear in the market currently, to consider a crash scenario in the short- to mid-term.
Wall St. Cheat Sheet
On the other hand side, if you take a close look on the charts, e.g. the Dow Jones Industrial Average, or the S&P500, we are exactly within a long-term upward trend channel since the Great Depression in the 1930’s. Of course, we are right at the top of the channel right now, but it does not look like a bubble structure yet. Look at the Dot-Com bubble, at that time the Dow Jones well exceeded the trend channel and thus corrected back into it, losing 40% of its value.
Are we going to enter such a bubble scenario again? I believe, that we could form such a bubble structure and exceed the trend channel ones again, driven by our current monetary policy. Therefore, I will take a close look on how the markets will react in the upcoming months, whether we will cross the upper trendline, or if we will reverse back into the channel, e.g. into a sideways movement. But overall, the long-term uptrend is still intact and the charts do not look wrong at all. Especially for long-term investors, I do not see a problem to further invest in the stock market and take advantage of further gains.
Dow Jones Industrial Average Index
In the following you will find a short summary of my personal view about the market developments in the upcoming months and years:
Short-term outlook until the end of this year:
- In the short-term, market developments will be shaped by uncertainties due to the presidential election in the U.S. and halted negotiations for further stimulus payments.
- Although the pandemic is worsening right now, I do not expect another economic lockdown and thus a second market crash, as in March this year. But I will follow the news about that closely, just in case the situation will change.
- I expect more volatility and corrective moves until after the election in November, which I will take as buying opportunities.
Mid-term outlook until 2021/2022
- The release of a vaccine has the potential to trigger another stock market rally. Especially companies, e.g. from the industry sector, that are still down year-to-date could benefit from that.
- Until then, markets will be supported by further stimulus payments.
- More, especially small companies and businesses will need to file for bankruptcy, while big and healthy corporations will benefit from that and take their market share.
Long-term outlook until 2030
- The U.S. dollar currency index (DXY) is close to the upper trendline of a long-term downward trend channel. It is likely that it will turn over and fall, until it reaches the lower trendline of the channel again. Thus, fiat money will be further depreciated.
- This behavior will be accelerated by our current monetary policy of stimulus payments and money printing.
- Following that, all assets e.g. stocks, precious metals, cryptocurrencies, and real estate will increase their price long-term, because of money depreciation.
- In terms of the stock market, we are still following a long-term uptrend. A bubble structure is not visible in the charts yet, but could be the result of our current monetary policy.
What are your thoughts about the stock market and its further developments? Do you believe in another crash or do you agree with my outlook? Where do you think we are currently, considering the Wall Street Cheat Sheet? Leave me a comment.