Markets are functioning well. The trading stops are working as designed. But, with a global recession at hand, the fundamentals on which value decisions are based will deteriorate. It's a guess as to how far.
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The Difference Between Long and Short Trades
Market volatility has sparked fears of a Covidinduced recession. To glean insights into the path aheads, business leaders need to take a careful look at market signals across asset classes, but also look beyond the markets to recession and recovery patterns, as well as the history of epidemics and shocks. Having largely ignored Covid as it spread across China, global financial markets reacted strongly last week when the virus spread to Europe and the Middle East, stoking fears of a global pandemic. Since then, Covid risks have been priced so aggressively across various asset classes that some fear a recession in the global economy may be a foregone conclusion. In our conversations, business leaders are asking whether the market drawdown truly signals a recession, how bad a Covid recession would be, what the scenarios are for growth and recovery, and whether there will be any lasting structural impact from the unfolding crisis. Instead, we must take a careful look at market signals across asset classes, recession and recovery patterns, as well as the history of epidemics and shocks, to glean insights into the path ahead. Valuations of safe assets have spiked sharply, with the term premium on long-dated U.
Have we hit bottom?
Despite these positives, several important factors, including long-term market psychology, technical-cycle analysis, valuation, and smart investor behavior, suggest that this bear market has not yet seen its low point. Investors are too bullish: Let's start with long-term investor psychology. In the past few weeks, I have received numerous questions from readers to the effect of, "I am a long-term investor, should I be putting some money to work in the stock market here? One of the survey questions asks if respondents expect higher stock prices in the next 12 months. Instead of fear, investors are exhibiting signs of greed.
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