Stock markets continued to grow strongly last week and, according to the broadest global stock index MSCI All Country World, have attributed a highly above-average gain of 5.6% since the beginning of the year. Major stock indices reached new all-time highs over the past week, as did the global stock market capitalization, the aggregate value of all exchange-traded companies, which currently stands at $ 110 trillion.
What will be the development of the stock markets in the coming months? My outlook is slightly negative. First, stock market performance in recent months, despite the global pandemic, has been truly phenomenal. MSCI All Country World index has gained 17.6% in the last 12 months. At the same time, historically in the financial markets, after a period of strong growth, there is usually a period of yield fast.
Second, the valuation of global stock markets is enormously high, close to historical highs. For example, the global P/E trailing is currently 33.6, well above the long-term average of 20.3. From a historical comparison, high equity valuations are strongly correlated with below-average expected and future realized returns.
Third, global inflationary pressures are currently at multi-year highs, as measured by inflation swaps. Therefore, I cannot rule out that realized inflation will also rise significantly above the central banks' inflation targets in the coming months. After all, the quantitative easing aka money printing of key central banks is still unprecedented and fiscal policies remain very loose.
On the other hand, it is also true that the monetary stimulus of key central banks is still incredibly strong. And since the global financial crisis in 2009, stock markets have been very strongly correlated with central bank money printing and global money supply growth. Therefore, I believe that probably no major correction is on the agenda.
Therefore, my baseline scenario for the future assumes that the major stock indices will move around current levels in the coming months, and I would not be surprised if we saw a slight profit-taking and a healthy correction of around 10-15%.
Investment Strategist at Conseq Investment Management, a.s.