Equity markets improving after the recession

Extraordinary stock rally poses a dilemma to investors

The recovery of the global equity markets since March 23, 2020, has been the strongest three-month period in the post-war era. These rallies are rare. They also keep many investors from taking part, because no one wants to buy at the top. What should they do, then? Investors are subject to a classic dilemma: They are always torn between staying or going.

The markets have sounded an "all clear" in the battle between bears and bulls.
However, taking the middle of the road is probably the best option. After all, no one doubts the warning that printing money at ever greater speeds will turn out badly in the end.

At the same time, bears are often critical when the stock exchange is decoupled from reality, as seen during the major financial crisis of 2009. But when we look back on the past ten years, the bulls' viewpoint is more accurate than that of the bears.

The Fed supports the equity markets

Do you remember the "Fed model"? It proposed that equities would be valued fairly if their price-earnings ratio (P/E) was about the same as the inverse of 10-year bond yields. Because even the US Treasury yields have dropped to 0.8%, the Fed model suggests that a P/E ratio of 125x would be fair. It sounds crazy, but maybe it explains at least in part why the P/E ratio of the S&P 500 has risen from 12x to 22x since March 23, 2020. It shows that equities remain more attractive for the long term than cash.

What's more, investors should never doubt the power of the famous "Fed puts." Since the 1980s, all presidents of the Fed have boosted the equity markets at just the right moment. The same was true this year with the largest put on record: the "Powell put." It is America's answer to the deepest recession since WWII, and is likely to keep interest rates and returns on the capital markets low for years to come. All capital markets and their investors will benefit from this over the long term.

From recession to recovery

The global recession is over. It was short but severe. Now comes the global recovery, which is admittedly a long-term process that will include some setbacks. Cautious investors must consider the risk of new infection waves or geopolitical uncertainties appropriately. The road to recovery will still have some potholes.

What to look out for when it comes to investments

The benefits of looking long term are threefold for investors:

1. Over the long term, it is best not to oppose the Fed, especially when it has a clear and consistent strategy for controlling the bond markets and supporting its national economy.
2. In the short term, there is a higher risk that the stock markets will need to "take a breather" soon. This is reason enough to realize some profits after considering all angles, and to reduce equity weighting back to strategic territory. Long-term investors can use a summer correction as an opportunity to buy.
3. If we do fall back into a recession, the digital economy is likely to be among the winners once again. It will remain the beneficiary, driver, and transformer in the major makeover of the global economy.

And finally, asset management is not a matter of "true or false." Rather, it is a multi-faceted trade that is based on research findings as well as solid processes, well-functioning decision-making bodies, and sometimes a keen sense for market psychology.