There are several variables, including the acceleration of infections from Covid, which are impacting the markets and which could lead to an increase in volatility in the coming months. However, the general picture remains solid thanks also to the accommodative policy of central banks in Europe and the USA. What to do then? This is the theme that Alessandro Fugnoli, Strategist of Kairos, explores in his monthly appointment “On the 4th floor”.
According to Fugnoli, the loss of momentum of the stock markets has been visible for a few weeks. “More than on the indices – observes the expert – the malaise was evident in the extent of the rise, or in the number of stocks that participated in it and which has been progressively reducing. The contribution of the cyclical stocks that had driven the rise in the previous months and which have moved back from the maximums, in some cases, even to a significant extent, has ceased ”. Not only. For some sectors, such as banking, there is a drop in interest rates which penalizes profits. To this must be added the acceleration of the pandemic.
This set of conditions has begun to produce a correction that could continue with alternating phases throughout the summer. If these negative factors justify a correction, however, the factors that should first contain it and then allow a recovery in the coming months should not be forgotten. The first is the acceleration of the services sector, which compensates for the slowdown in manufacturing, the second is that the slowdown in manufacturing is likely to be temporary, given in particular the need to replenish the past, which fell to very low levels everywhere. The third is that monetary policies remain ultra-expansionary, both in the US and in Europe.
“Finally, it should not be forgotten – remembers Fugnoli – that the correction causes a rebalancing of portfolios, painful on the one hand, but on the other a condition for a less speculative recovery. Navigating the volatility in rough sea conditions can be a temptation, but a lot of caution is still advisable ”. In conclusion, the situation is fluid, but the conditions for a solid market in the next 12/18 months are still there.