Investment Blog

Equity markets are giving mixed signals. Many people are wondering whether the markets will go up or down from here.

Here is my take.

Below are the factors which could lead to further market decline:

1. Tariff wars leading to retaliatory actions from different countries. In such wars, everyone suffers. It leads to inefficiency, unpredictability, and distrust in the system, leading to higher inflation and a slowdown.

2. Disappointing corporate profitability: Uncertainty results in delayed decisions and outcomes. A correction in stock markets will have a negative wealth effect, leading to lower discretionary spending, which leads to lower sales and profits, which results in further stock market correction. It’s a self-feeding loop that will be difficult to exit unless the Government has the will and capacity to intervene.

3. Expensive Valuations: Despite recent corrections, valuations continue to remain in the expensive zone in many pockets of the overall stock market. This indicates further downside risks.

Below are the factors which could lead to the market resuming its upward trend:

1. Trump softening his stance: Many country heads associate their success with the success of stock markets. A continuous falling market may force Trump to soften his stance towards tariffs and other hard measures. There is a possibility that after all the bravado, favorable negotiation terms are reached and things get back to normal.

2. Capex revival leading to better corporate profitability: A lot of government spending in the last few months will start showing its impact on GDP growth and corporate revenues. More money in the system will revive the much-needed stimulus for growth. The impact should start reflecting from next quarter onwards.

3. Decline in interest rates could revive the animal spirit and appetite for risky assets. A slowdown will prompt central bankers to cut more aggressively than projected.

Probabilities seem to be slightly higher for the short-term negative outcomes, but probabilities can change very quickly in either direction.

Having said that, there are many unknown knowns & unknown unknowns which will influence the stock market direction. Therefore, I avoid making any decisions based on future predictions.

Investment decisions based on certainty are a recipe for disaster.

Therefore, a portfolio should be designed for uncertainty. Such a portfolio grows well (not the highest returns) if things turn out to be good and fall much less in case they don’t.

Over the complete cycle, such a portfolio beats the respective benchmark while going through much lesser volatility than the benchmark.

Originally posted on LinkedIn: www.linkedin.com/sumitduseja