My forecast for the last quarter of 2020: negative
I want to elaborate on my previous blog post about correlation of S&P 500 and GDP data which shows that economy and the market go hand in hand in 70% of cases. So, let’s have a look at the GDP forecasts for upcoming quarters and see if we can forecast market behavior.
How do we forecast GDP data? Let’s see what the World Bank, OECD, IMF, FED have to say about it.
World Bank opinion:
As you can see, there’s a negative forecast for the world’s economy in general (-5,2%) and with 7% economic downturn for United States in particular.
In principle, it can be said that it coincides with the World Bank's forecasts.
What about the Federal Reserve?
FED’s forecast is more optimistic by projecting only a 3.7% drop. And the mood has improved - June forecasts were much worse.
In my opinion, the OECD's forecast is the clearest, considering the possibility of COVID-19 second wave, which is actually upon us already:
What does all this give us?
It gives us an idea of what is happening in the economy. And, in my opinion, we have to stick to the scenario that the virus will not retreat so easily and there will be (it is already) a second wave of COVID-19. It may not hit the economy as hard as the first one, but it will definitely impact it.
Returning to the data. There was a slight economic downturn in the first quarter and the S&P500 also fell in March (at the end of the first quarter). The market fell very impressive - 19.6%. The fall was also influenced by emotions, as there were very poor forecasts and scenarios, as in times of uncertainty. Nobody knew what is going to happen, and the news were filled with numerous scenarios, theories and even horror stories.
In the second quarter, S&P500 rose by 20%, but the economic downturn was more than impressive. This was one of those rare times when the market behaved against the economy. Why? Because the market predicted that the worst is already left behind and from now on everything will eventually get better.
The forecast of the third quarter is slightly better than the previous one, but partial economic stagnation is still present. Slight increase in July and August followed by fall in September. In short, the market stands still.
Adhering to the OECD scenario that there will be a second wave of COVID-19, there should be a decline in the last quarter but not as big as in the second quarter. Which also makes sense because all parties involved know how to act accordingly. Thus, considering the historical correlation, the market must fall in the last quarter or “stand still”. Most likely we’ll see a trend at the very end of September.
Wrapping up all this – the last quarter is forecast negative. Consequently, it can be predicted that the market will also be declining. In addition, there is another factor of uncertainty – US president elections. Whatever the outcome, be careful and patient. Most of your time (80%) you have to wait for your opportunity and only 20% of the time goes to real trading. Keep that in mind.