How will the recent COVID-19 trends impact stock prices in the short and long run?
Recent COVID-19 trends appear likely to have a definitely positive effect on the real economy. As more of the economy opens, the unemployment rate should continue to drop, and GDP should continue to expand at a good pace. The effect of these trends on stock market prices is, however, far more difficult to determine. By most metrics, valuations in the stock market are very high. Effectively, the positive implications of the COVID-19 trends appear to have already been incorporated in stock market prices, which can limit stock market returns moving forward.
Is the current stock market prone for a correction or is there still room for growth?
It is almost impossible to determine whether a stock market correction is imminent or likely. What has been demonstrated in the academic literature is the correlation of some valuation-linked variables with intermediate- to long-term future stock market returns. Given the rich market valuations we currently observe, these stock market return forecasting methods suggest very low stock market returns over the next 7 to 10 years. What is not able to be determined in these types of forecasts is the sequence of these likely low returns. We could experience 5 very positive years followed by 5 absolutely terrible ones, or perhaps consistently low but positive returns for the next decade, or something different from either of those outcomes. But the current indications are that market returns should be quite low, on average, over the next decade or so.
What tips do you have for an individual investor? What sectors are expected to grow the most in the coming years?
This is a very challenging investment environment. Stock market returns are expected to be relatively low, and with interest rates so low right now bond returns are mathematically bound to be near historic lows. Over the last decade, however, value stocks have greatly underperformed growth stocks, while historically they have outperformed. Value stocks may end up being a wise place to invest. Further, publicly traded companies headquartered in developed economies outside the United States appear to be less expensive than their U.S.-based counterparts, which may also indicate that they have higher expected returns over the intermediate- to long-term.
