Stock market forecast for next 3 months
By Dan Atkinson
07:58, 10 June 2020
You’d have needed strong nerves, but anyone who bought into major stock markets during the torrid days of late March could be forgiven for feeling a little smug now.
Back then, shares were being hammered by the fall-out from the coronavirus as predictions abounded of the worst downturn since the Great Depression and, in the case of the UK, since the War of the Spanish Succession, which ended more than 300 years ago. All key indices seemed to have fallen off a cliff as traders and investors sought to figure out which, and how many, companies were likely to survive the crisis.
Now, however, prices have recovered and the stock market outlook for this summer is looking brighter than could have seemed possible a short while ago. It turns out that, as with previous crises such as the 1973 energy shock and the 2008 financial crisis, predictions of the end of industrial civilisation may well have been premature.
Upward momentum
So where are we heading in the next three months? Before sifting the latest stock-market predictions, it may be useful to look back at where we have been.
Three months ago, on 5 March, London’s blue-chip FTSE 100 index closed at 6,705.43. It is currently below that level, trading at 6,427.81 at the time of writing. But that is positively buoyant compared with the three-monthly low seen on 23 March of 4,993.89.
Since that trough, the momentum has been upwards, with each low and peak being higher than the previous ones.
Across the Atlantic, the Dow Jones index has followed a similar pattern. It stood at 26,121.28 on 5 March and trades at 26,281.82 at the time of writing. As with the FTSE, its nadir came on 23 March, when it fell to 18,591.93.
Germany’s DAX index closed at 11,944.72 on 5 March and traded at 12,693.62 at the time of writing. Its trough came on 18 March, at 8,441.71.
Tokyo’s Nikkei 225 index closed at 21,329.12 on 5 March and is trading at 22,863.73 at the time of writing. Its three monthly low point was seen on 19 March, at 16,552.83.
The Dow, the DAX and the Nikkei all show the same pattern of upward momentum as the FTSE, although the London index is the odd one out in being the only one of the four that is currently still below its level on 5 March.
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‘Risks are substantial’
Is this general recovery likely to continue into the summer? That raises a second question, which is what factors are likely to influence markets during the next three months?
First and most obvious is the state of the world economy. On the face of it, this does not look likely to support a stock-market recovery. In April, the International Monetary Fund (IMF) declared: “As a result of the pandemic, the global economy is projected to contract sharply by 3 per cent in 2020, much worse than during the 2008-09 financial crisis. In a baseline scenario – which assumes that the pandemic fades in the second half of 2020 and containment efforts can be gradually unwound – the global economy is projected to grow by 5.8 per cent in 2021 as economic activity normalises, helped by policy support.”
But just as you may be thinking the 2021 figure does not sound too bad.
So is our modest stock-market rally doomed? Not at all, for two reasons. One is that huge amounts of liquidity have been pumped into the financial system to try to stabilise economies during the crisis, and there is no doubt that much of it has ended up invested in equities. At some point, that support will be withdrawn, but not yet.
Rally likely to continue
The other is that stock-market operators pride themselves on being forward looking, on trading the future rather than the past. Just as a stock market crash can foretell an economic slump, an uptrend can indicate economic recovery ahead. On top of which, perhaps the strongest emotion in financial markets is neither fear nor greed, as popularly supposed, but optimism. By instinct, most traders and investors like to walk on the sunny side of the street.
Aside from the economy, by the end of the summer the US presidential election will be entering its home straight. This could have had the potential to upset markets had the Democratic Party chosen a more radical candidate than the former Vice President Joe Biden. As it is, neither the incumbent, Donald Trump, nor Mr Biden can be cast as an enemy of the free-enterprise system. Only if the result is inconclusive or contested, as in 2000, does the election have the potential to upset markets.
Widespread social unrest, sometimes violent, in America recently may be tragic, but in truth is unlikely to affect the price of financial assets.
As we have seen, major markets seem to have followed a similar trading pattern during the previous three months, making it unlikely that they will “de-couple” during the next three months, moving in different directions, a development that would add for traders another layer of uncertainty. The likely absence of de-coupling is another reason to be fairly cheerful.
Of course, another major coronavirus outbreak, or escalating tension between China and the West, or uncontrollable disorder in US cities are among the potential factors that could end the market recovery. But for now, the best estimate for stock market performance during the next three months is for the rally to continue.
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