Weekly Wrap by Pythagoras Investing: Bull and Bear views

The US election looms as a point of great uncertainty.  As we get closer I expect some uncertainty to rise – with Melbourne Cup, The RBA meeting and the US Election all on the one day!

This week we wanted to review the arguments for the bulls and the bears to understand the differences – all in a page. 

Bearish (negative) views of the market

  • excessive governmental debt worldwide.  They are at WW2 levels and rising.
  • bankruptcies are high and ongoing
  • structural unemployment is a risk as people can’t get jobs post pandemic
  • quantitative Easing – ie government stimulus leads to deflation or a lower future value of assets and goods
  • coronavirus causes people to be risk adverse overall … therefore they save not spend
  • ongoing coronavirus waves 2/3/4 etc
  • either no vaccine or herd immunity isn’t able to be reached
  • Leads to shares are overvalued relative to the underlying earnings.

Bullish (positive) views of the market

  • start of a cyclical recovery in earnings from a health induced recession
  • sustained expansionary policies – the government is unlikely to go broke. 
  • China strong and can help the world economies through its success
  • significant surplus capacity exists everywhere: factories, employment etc.  This means that the profit leverage through sales/revenue will lead to earnings can bounce back quickly.
  • confidence is gained by businesses and people … who spend not save.  In Victoria the population have saved
  • vaccines facilitate reopening of the economy – one is positive, many is better
  • substantial pent up demand exists for those who have employment … once safety is felt this could be unleashed.
  • we expect the easing of responsible lending laws to make credit assessment faster and speed up the flow of credit.
  • equities boosted by low Interest rates … which appear to be able to persist for some time.  Investors have paid up for equities now in the industrials space, not so in resources related areas and certainly not for financials (perhaps with good reason).

If a real vaccine is found, people will get much less risk adverse and markets will jump.  If not, we get a shake down.

We expect to see some uncertainty creeping into markets in November.  But our forecast for 6800 on the ASX200 stands.

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