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The last thing I want is to believe I know everything that’s relevant for successful investing. That’s why I’m always checking out people I respect to see if they’re seeing something I could be missing.

One guy who fits this bill is Beta Share’s chief economist David Bassanese, who recently summed up what he’s seeing that could be the key drivers of the stock market. 

I want insights on why the US stock market seems to be ignoring second-wave infections. And I want to know whether we should we be bracing for a pull back, which I then would see as another buying opportunity. So I intend to ‘de-economize’ David’s technical talk to give you, our Switzer Report subscribers, his main observations and bottom line.

On the V-shaped recovery of stocks, this is his take: “Equity investors remain hopeful due to ongoing monetary support, tech sector resilience, vaccine hopes and avoidance (so far at least) of a return to widespread lockdowns in much of the developed world.” 

Basically, all the government spending and support from central banks is resulting in company reporting coming in better than expected. We’re even seeing that here, with this week’s retail numbers unbelievably good. Retail trade rose by 2.7% in June against a consensus of 2.4%, after rising by 16.9% in May. And now retail trade is up 8.5% over the year — this is boom time stuff!

The charts below show how crazy things are right now and why investing is challenging. 

The MSCI chart above says the shares index is above the 12-month moving average. But the chart next to it, on bond yields, show that they’re falling. This says economic growth isn’t promising. That’s a conflict with the shares chart but it’s consistent with the gold chart underneath it, which shows the ‘fear factor’ metal is in record price territory. And the US dollar falling (while not a great sign for confidence its economic outlook) will help growth there. Australia has learnt that a low dollar is good for economic growth.

David makes the point that global equity fundamentals are “counting on low bond yields and stabilisation in earnings expectations.” The fact interest rates are so low makes stocks look attractive. But there’s a lot of faith that 2021 will be great for growth because of the huge spending and low interest rates. And David didn’t say this but there has to be a belief that a vaccine will help the economic outlook. “On an outright basis, PE valuations remain well above long-run average levels, though relative to current low bond yields, the market is less obviously expensive – the equity-to-bond yield gap is only modestly below the average of recent years and still comfortably above 20 to 50 year average levels,” he points out. 

If you don’t understand all this, well just think about this for a minute: low interest rates make higher PE valuations more acceptable. When I was younger if a PE went over 20, I thought that’s akin to a 5% interest rate — 100 divided by 5 = 20. But with rates so low, even with a 2% interest rate for term deposits, that would mean a PE of 50 would be tolerable!

Did I say these are crazy times? 

On thinking where to invest going forward, David looked at key global equity trends.

The table below shows emerging markets are reacting to a lower US dollar. Meanwhile “technology and consumer discretionary stocks continue to perform relatively well at the sector level, while growth, momentum and quality remain the leading global factor exposures.” 

Source: Bloomberg.

I know there’s a lot to take in, but this table tells us a lot about what’s going on. 

The MSCI EM shows how Emerging Markets have gained as the dollar falls. China’s quick rebound out of the COVID-19 restrictions is important to this story. Also note how the S&P 500 is up 12% over the last 12 months but more normal economies’ stock markets are down. Europe is still off 8.6% and we’re down 9.9%.

Explaining that is the fact that the Coronavirus has been great for technology stocks first as we buy online and watch Netflix from doing business at home. The table shows tech stocks up 37.9% for the year. 

And because we’re using telco services like Zoom and Skype and a lot of mobile phone stuff, communications stocks are up 21.2%. Finally, because we can’t travel and we’re stuck at home, we’re buying TVs, lounges and other home improvement items. Consumer discretionary is up 17.2%.

So that’s a lot of David’s observations, with a bit of my views thrown in. What follows is my conclusion. 

Interestingly, the real laggard sectors on the table above are financials (down 15.4%) and energy (off 36%). Anyone wanting to play a long, contrarian game to make money (when this Coronavirus crisis ends) will be looking at these two sectors because their share prices will shoot higher, when we expect a full-blown recovery is on the way.

That scenario will need help from a vaccine but at the same time it will put downward pressure on tech stocks and gold. 

Peter Switzer is one of Australia’s leading business and financial commentators, launching his own business 20 years ago. This information was produced by Switzer Financial Group Pty Ltd (ABN 24 112 294 649), which is an Australian Financial Services Licensee (Licence No. 286 531). All prices and analysis at 10 August 2020. This material is intended to provide general advice only. It has been prepared without having regard to or taking into account any particular investor’s objectives, financial situation and/or needs. All investors should therefore consider the appropriateness of the advice, in light of their own objectives, financial situation and/or needs, before acting on the advice. This article does not reflect the views of WealthHub Securities Limited.