3 Scenarios for Financial Markets

FT.jpgThe Financial Times’ Investment Editor argues this week that “there is no point in forecasting stock market performance to the last digit“.
Instead it presents 3 scenarios for 2010:
Standard Bear Market. This view suggests that the current rally is “the normal adjustment after a market crash“. After the rally ends, we will then see “a decade of trading in a range“, with money to be made “by traders rather than long-term investors“.
Great Panic. This suggests 2007-9 was merely a “panic“. Now “the risk of disaster” has gone, there is a “buying opportunity” for investors, and “profit opportunities for companies, as they can cut costs more easily“.
Second Great Bust. The downside fear is that whilst “cheap government money rescued markets” last year, this caused a “credit bubble” in China, and meant “the US put its credit rating on the line“. The likely “next event will be a market disaster“, taking us below 2009’s lows.
The FT has sympathy with all 3 scenarios, but suggests the odds favour the Bear Market view at 60 – 70%. It gives a 10 – 20% probability to the upside and downside views.
It says its prefered measures of stock market value, Tobin’s Q and the cyclically adjusted price/earnings ratio, both show markets are now overvalued. The FT therefore concludes that “it is still a very risky world“.

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