Rising number of cases
With the return of the wave of illness, the uncertainty and volatility on the stock markets has returned. In particular, concerns about a new, global lockdown are causing investors to doubt the sustainability of the economic recovery. New restrictions have already been enacted in Europe, and a great many are also feared. It is therefore not surprising that the cyclical German share index in particular shows relative weakness, as is so often the case in downward phases. The perceived loss is huge these days, but the globally oriented MSCI World Total Return Index lost only 0.2 percent in euros from October 1st to October 27th. Although the German stock market delivers long-term returns similar to global indices, investors who focus on their home market tend to find it more difficult not to lose their nerve over the entire period due to the significantly higher fluctuation range.
Restrictions still limited
Many new restrictions have been introduced, but these differ from the restrictions at the beginning of the year. Past developments have produced a political learning effect. Essential areas of the economy can therefore currently be sustained. Schools and kindergartens also remain open in large parts of Europe. Of course that could change. However, markets move based on probabilities rather than possibilities. And political decisions like lockdowns are in the long run dependent on many factors such as popular support and court decisions.
Low expectations against a global bear market
Many investors feel that new, possible restrictions have pushed them back to the beginning of the year. Memories of the panicked sales in February and March stir up emotions that were long forgotten. But in contrast to the beginning of this year, the mood is trapped in skepticism and expectations are low. Investors expect a second wave and partial lockdowns. Markets move through surprises and the difference between expectations and reality. When a weak reality meets possibly weaker expectations, markets rise. This relationship reflects the basic functioning of stock markets, which is often fundamentally misunderstood.
It would therefore take a significant negative surprise to the status quo to cause a major downturn in the market. Controlling emotions is becoming increasingly difficult, especially in a year like 2020, as investors are particularly challenged in their resilience. But this quality is seldom more important than in times of crisis. So it helps to remember that long-term superior stock market return includes all major crises.
The risk of a second lockdown is real and shouldn’t be belittled. A prolonged closure on a global scale could cause significant permanent damage. However, the potential for negative surprises is currently very limited. The mood on the market is deeply skeptical. An even worse sentiment and volatility on the order of a correction is currently quite possible. A new bear market, however, would need a more negative development than is included in the current planning. While current developments require extremely close monitoring, the potential for negative surprises remains limited. Emotional control is more important than ever.
You can request the current capital market outlook from Grüner Fisher Investments free of charge at www.gruener-fisher.de.
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