Despite increasing cases of COVID-19 across the world, stock markets, particularly in the United States, are functioning at historical highs - which is a large disconnect from reality. Is this sustainable?
According to Louis Teo, Market Strategist, Fullerton Markets International Limited, this disconnect between reality and movements on the stock markets is largely driven by optimism in economic recovery, which he believes is largely misplaced, and it is only a matter of time before reality will set in.
During the session How To Trade In The Era Of The New Norm at the TradeON Summit, brought by ForexLive, Teo explains that we are seeing a V-shaped recovery based on three main factors - unlimited quantitative easing from the US Federal Reserve, optimism about economies reopening and new traders creating FOMO (fear of missing out) on apps such as Robinhood within the markets.
"At least, for now, I believe that the fall will come eventually. Not whether it will come, but when," Teo said during his session at the TradeON Summit.
Louis Teo: reopening economies won't save them
However, as explained by Teo, this optimism, which is reflected in the stock markets is likely misplaced. Namely, because reopening economies doesn't mean countries are going to avoid recessions.
"We are experiencing things that we have never experienced pre-COVID-19. These things are here to stay. For example, social distancing, working from home, spending patterns bring more stores to close," Teo added.
"All of these are things that will be here for a long time, or even forever. So these are changing the dynamics of how the economy will be recovering. All this will have an impact on the stocks futures eventually."
Rich stop spending
Using the United States as an example, due to it being the country with the largest consumer spending in the world, Teo points out that recessions are caused when consumers stop spending.
The uniqueness of COVID-19 is that now, people aren't spending money on different things. Typically during recessions, consumers might not buy a new fridge, a new car, computers, or other appliances and items.
However, thanks to the coronavirus pandemic, people aren't spending money on services - restaurants, gym memberships, travel, and other expenses that have been limited due to lockdown restrictions and are usually steady during recessions.
"All in all I feel that once the market realises 'hey consumer spending may never reach pre-COVID highs, the economy may never recover to pre-COVID highs,' the stock markets being forward-looking… it means they will start to price that in eventually and realise by the end of this year the economy may never recover to what it was before, and even by 2020, the economy will never be back to pre-COVID-19 highs unless a vaccine is found."
When it comes to the Dow Jones and S&P 500, Teo is waiting for a retracement and expects that the indices will fall back to the lows seen earlier this year in March. But gold, he believes, has room to go higher.
For the full session hosted by Teo, register (it's free) for the TradeON Summit here.
