By Jonathan Baird – July 22, 2021
Global stock markets, fueled by a combination of unprecedented fiscal and monetary stimulus and extreme investor optimism, have soared to match the value of global GDP. The only previous example of this behaviour occurred at the peak of the internet bubble at the turn of the century.
The previous example of this phenomenon can be largely attributed to a reaction to the appearance and early development of the internet. The current situation is more purely a product of investor optimism generated by the notion that ongoing intervention by governments will shield them from significant market declines.
While both instances illustrate market extremes that represent poor risk/reward propositions for investors, the current example may prove the more problematic. That is because the global economy is
much more fragile now than in 2000, with enormous amounts of debt accrued system-wide since the 2008 Financial Crisis. As well, central banks have fewer tools at their disposal now, with much of the world already employing negative interest rates and open market interventions already at an extreme.
Both the global economy and markets are precariously perched. An eventual correction/bear market is an inevitability. It is unlikely that the current, seldom seen, market extreme will be resolved without producing a considerable amount of market volatility. Future turbulence will have an amplified effect on investor psychology given the unusually low level of market volatility seen over the past decade.
We suggest adopting a strategy designed to preserve the bulk of accrued investment profits if evidence of a change in market trend becomes apparent.
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