Stock market forecast for next 6 months
By Dan Atkinson
09:01, 26 June 2020
Stock markets on both sides of the Atlantic and of the English Channel continue to recover from the dark days of March and April, with strong positive upward momentum.
But can it last and what is the likely stock market forecast for the next six months?
Looking ahead into the early Winter, there are reasons to be cheerful but also potential hazards in our path.
Recovery under way
First, a backwards glance at recent history. London’s blue-chip FTSE 100 index traded at 6,320.12 on the morning of Midsummer Day, 24 June. One month earlier, on 26 May, it had stood at 6,067.76, and three months ago, on 24 March, the level was 5,446.01.
The three-month low was seen on 3 April, at 5,415.50, and the three-month peak was reached on 5 June, at 6,484.30. Thus momentum is strongly upwards, although the index is encountering resistance at about 6,400.
Going back before three months is largely pointless, as the world changed so much in the early Spring. Far better to extrapolate six months forward from the trend since March.
Across the Atlantic, the Dow Jones index stood at 26,156.10 on 23 June, having traded at 24,995.11 a month earlier, on 26 May. Three months ago, on 24 March, its level had been 20,704.91, its three-monthly low.
The three-month high was seen on 8 June, at 27,572.44. Again, momentum is strongly upwards, with some resistance, in this case at 27,000.
Then there is the Euro Stoxx 50, the index of the “super-sector leaders” among companies in the euro-zone. On the morning of 24 June, this stood at 3,241.69, having traded at 2,971.35 a month earlier, on 25 May. Three months ago, it stood at 2,715.11 on 24 March.
The three-month low was seen on 3 April, at 2,662.99 and the three-month high on 5 June, at 3,384.29. So a similar pattern in terms of momentum, with some resistance in this case at 3,300.
To sum up, a recovery is under way in major markets, with no immediate sign that this will flag. So what changed between the early Spring and now, and can that effect last over the next six months? What, in short, is a robust stock-market prediction?
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Tendency to optimism
There is no single reason for the recovery. One is likely to have been the staggering quantities of liquidity pumped into the world financial system by central banks in an attempt to stabilise economies.
Such a monetary injection tends to lift share prices for two reasons: it provides the cash for those that wanted to buy shares already and it depresses the returns on so-called risk-free investments, such as cash and government bonds, sending investors in search of higher-yielding assets such as stocks.
Another is the passing of the darkest and gloomiest phase of the epidemic, the one in which vast numbers of deaths were forecast, a semi-permanent economic depression was said to be on the cards and the whole basis of advanced societies, it was suggested, was at risk. Now, the thinking is that the coronavirus has certainly sparked a crisis, but not one that is insurmountable.
Following from that, there is an expectation that normal stock-market activity will resume, perhaps sooner rather than later, with companies floating their shares, making takeover bids for one another and, on occasion, being taken private, at a handsome premium for shareholders.
Finally, investors and traders tend to be optimistic. Bulls usually end up outnumbering bears, and, historically, the number of “buy” recommendations issued to clients of brokers and investment banks heavily outweighs suggestions to “sell”.
Looking forward six months, a crude calculation, taking the performances of the past three months since the depths of the share slump, would see the FTSE up another 32%, the Dow Jones up another 52% and the Euro Stoxx 50 up another 38%. These are big numbers, but bear in mind the low trough from which they are coming and the fact that they could actually prove an underestimate, given that upward momentum can be compounded, gaining extra strength from the direction of travel. And there seems no immediate reason to doubt that stocks will continue to ride what seems a mixture of relief and delight as the worst coronavirus-related fears ease.
Beware of storm clouds
But, there remains a number of hazards that could cloud this sunny stock market outlook. One would be a remarkably close outcome in November’s US presidential election. Twenty years ago, the result of the 2000 election ended up being decided in court, after which there was a great deal of bitterness on the part of the losing Democratic Party. This was a time of prosperity and general cross-party goodwill in the United States and pre-dated both the war on terrorism and the Great Recession.
This time round, in Donald Trump’s America, such an outcome would almost certainly have much deeper and more troubling repercussions.
Another potential pitfall would be a second, equally virulent coronavirus epidemic, forcing governments to reverse the lifting of many lock-down measures. Such a wave of the virus could re-awaken market fears that the “new normal” is a hostile climate for equity investment.
An escalating US-China trade war is a third possible upset to the optimistic case for the next six months. The latest edition of Foreign Affairs notes that: “US Trade Representative Robert E. Lighthizer argues for a trade policy that prioritises American workers. ‘The right policy is one that makes it possible for most citizens, including those without college educations, to access the middle class through stable, well-paying jobs,’ he writes.”
This suggests the Trump administration will not be softening its protectionist stance on trading partners any time soon.
Finally, after recent clashes on the Indo-Chinese border, there are growing concerns of a nuclear exchange between these two atomic powers. This would be the first time nuclear weapons have been used since 1945, and the consequences would be incalculable.
To sum up, any end-of-year stock market forecast would appear to be positive. Traders can take comfort from the fact that anyone forecasting that tomorrow’s weather will be the same as today’s will be correct 76% of the time, on average, thus for markets there is a better than even chance that the sun will continue to shine.
But they should keep an eye out for potential storm clouds.
Read more: Good stock market companies to invest in during the summer: oil, 5G, shopping
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