The RaceJanuary 27, 2021 -
Categorized in: IAG News
Over the next six months, reality will unfold one day at a time and we will know whether traders have properly evaluated the economic trajectory for the United States.
In the best-case scenario, …
the next six months look like this:
- COVID infections continue their recent downward slope.
- The number of deaths and hospitalizations dwindle.
- The vaccine rollout accelerates.
- The government allows and even encourages economic activity to rebound.
- Additional stimulus is added to the economy to give it a boost.
- A sense of normalcy is achieved by mid-summer or early fall.
In the worst-case scenario, the next six months look like this:
- More infectious versions of COVID grab a foothold in the U.S. and expand rapidly.
- The vaccine rollout plods along with supply constraints.
- COVID-fatigued citizens abandon best practices for limiting spread.
- While most health care workers are vaccinated, hospitals are overwhelmed with additional cases and the number of deaths rises significantly.
- The government feels compelled to shut down the economy, perhaps even more strictly than last March.
- A sense of normalcy is delayed indefinitely.
Both of these scenarios are feasible, and once trends shift toward one or the other they could become self-reinforcing. Thus, we are now in a race pitting the vaccine rollout against the more contagious versions of COVID.
Right now, traders appear to have priced in something close to best-case scenario. There is optimism about normalcy returning, pent up demand for goods and services, and more economic stimulus. All of these would be positive for corporate earnings which influence stock prices.
This also leaves traders vulnerable if trends start shifting toward the worst-case scenario. It is always possible that traders’ optimism (greed) could turn to pessimism (fear) and we could see a market correction in the next few months.
Such corrections (or even bear markets) are a normal and expected cycle of traders’ overreactions to current events. One of the keys to potentially improving investment outcomes is acting like an investor instead of a trader. Investors purposefully use traders’ short-term impulses to achieve long-term goals.
Instead of attempting to achieve the impossible by consistently timing the markets, investors align their investments with their personal timeline and risk budget to consciously live above the daily market fray. This also gives investors the opportunity to buy low(er) and sell high(er) when traders reach extremes.
As this race unfolds, we could certainly see some additional market volatility in the coming months. Hopefully thinking like an investor instead of a trader will serve as your vaccine against poor decision-making when and if that occurs.
Quote of the week: Chinese proverb: “In the management of affairs, people constantly break down just when they are nearing a successful issue. If they took as much care at the end as at the beginning, they would not fail in their enterprises.”
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Any opinions are those of IAG and not necessarily those of LPL Financial. Expressions of opinion are as of this date and are subject to change without notice. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. No strategy assures success or protects against loss. Investing involves risk including loss of principal.
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