Knowledge Centre Archive
Economic Outlook: The Rally at Six Months
It has been a terrific run, with equity markets around the world recording a price gain of close to 20% over the past six months and the S&P 500 advancing more than 28% from its closing low on October 3. As is often the case, this breathtaking move to the upside had its genesis in a period of deep investor gloom. Back in late September and early October, there were many things spooking the financial markets: fears of recession in the U.S., the European debt crisis and the possibility of a hard landing for the Chinese economy, to name a few.
The question now is, "What comes next?" The economic and financial backdrop certainly has improved since the dark days of last autumn, but one can make the argument that the rally already reflects this improvement. Besides, new challenges are coming into view that will test investors and the resiliency of riskier assets in the months to come. In our opinion, the surge in stock prices has brought valuations back in line with the fundamentals. Instead of taking a contrarian stand as we did six months ago, we are more inclined to "go with the flow," maintaining a pro-cyclical investment stance until valuations become more worrisome, or the economic trends start to point toward another period of uncertainty and volatility. We will detail in this report some of the factors that investors should monitor as the rest of the year unfolds.
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