After the U.S. stock market recorded its best week in nearly five decades, you’d be forgiven for thinking the Dow Jones was due for an encore. But not even a historic oil production cut was enough to keep the risk-on mood intact ahead of what promises to be a grisly corporate earning season.
Unfortunately for investors, economist Mohamed El-Erian says that these wild swings in market sentiment and asset valuations are the new normal. And no matter what your favorite stock market forecaster claims, absolutely nobody knows where the Dow goes from here.
El-Erian, the chief economic advisor at Allianz, was one of the first high-profile economists to warn that the coronavirus outbreak could trigger a stock market crash.
But given the peculiar environment that accompanied this historic downturn, he says there’s “no playbook” for forecasting a recovery.
In this environment of enormous uncertainty, nothing would surprise me. We need to be great health experts to predict the market. And you need to get a feel for how far can the Fed go from here. These are really big unknowns… we have no playbook to guide us.
Fundamentals didn’t ignite the Dow’s fastest reversal in history, nor did they catalyze the stock market’s most aggressive weekly rally since 1974. Apocalyptic “narratives” drove the market down, and – today’s reversal notwithstanding – a spate of rosier narratives helped stocks rally off their late March lows.
These markets, when they move, they move really quickly. And what do they move on? A change in the governing narrative. We are very sensitive to narratives.
The problem is that narratives don’t always jive with reality. Nor is reality particularly easy to quantify reality these days anyway.
Stock market forecasting has become less about analyzing economic fundamentals and almost entirely about guessing what medical and fiscal narratives are going to rule the day in both the short and long-term.
This guessing game requires analysts to wrestle with a host of vexing questions simultaneously, most of which have no historical precedent.
And the stakes of this guessing game are only going to rise as corporate earnings season kicks off this week. El-Erian expects most major corporations to suspend their forward guidance, forcing investors to reckon with the fact that they’re flying blind.
That’s why he predicts that the next prevailing narrative will be that the economy will never return to “normal,” no matter when business activity begins to resume and when the coronavirus outbreak is finally in the rearview mirror.
The next narrative that’s going to develop… is the realization that the restart is going to be really tricky, and that the post-crisis landscape is going to be different.
So does that mean the Dow Jones is headed lower? Not necessarily.
Because there’s another narrative circulating, and it’s one that has begun to gain more traction following the Federal Reserve’s historic entry into the junk bond market.
This narrative is that the Fed will do whatever it takes to support risk assets. And some analysts believe that – congressional approval or not – it may even find a way to start buying stocks.
The bottom line is that, with markets burdened by this much uncertainty, El-Erian says that investors are going to mistakes. That leaves them with an uncomfortable dilemma.
“What mistake can you afford to make?”
Disclaimer: The opinions in this article do not represent investment or trading advice from CCN.com