'It's unreasonable to think the rally will be seamless'

The real black swan event was not the pandemic but the economic lockdown that followed, says CEO

'It's unreasonable to think the rally will be seamless'

The rally from the bottom of the pandemic sell-off has almost been as dramatic as the initial plunge from all-time highs. The S&P 500 stands on the verge of erasing its 2020 losses as markets gain confidence from the extraordinary monetary and fiscal response.

But Kevin McCreadie, AGF’s CEO and CIO, has warned that the next leg of the rally won’t be as seamless and believes it will be dependent on the restart of the global economy and whether that continues without a major setback.

He said: “What has transpired in markets since late February is truly remarkable. The initial selloff was unlike anything I’ve experienced before in terms of the speed and magnitude of the correction and the rally from the bottom has been equally unique.”

He added: “If you think about it, the real black swan event may not have been the pandemic, but the economic lockdown that resulted from it. I’m not sure anybody saw that coming, so getting the economy going again is going to be paramount to markets rallying further. Even then, it’s probably unreasonable to think it will be clear sailing from here. At some point, fatigue sets in during a crisis of this extent and it shouldn’t come as a surprise if markets go sideways for a while as investors await evidence that the restart is taking hold and process news around a vaccine or therapy for the virus.”

McCreadie also warned investors to prepare for more volatility on the premise that good news doesn’t move the needle as much as bad news. However, he believes that a retest of the March lows may be a diminishing concern, although a dip of 10% is possible if a negative “left tail” event affects the economy.

“If new cases of the virus continue to fall and more people return to work and the economy picks up faster than expected, market gains would likely be tempered and more moderate than the rebound to date off the March bottom,” he said. “But if the restart begins to falter and/or there is a second wave of the pandemic, watch out. The losses could pile up quickly, bringing the re-test of the March lows into play.”

He also cautioned investors against getting too obsessed with COVID-19 to the point where it obscures other risks, which could soon reassert themselves.

He added: “Take the flare-up in tensions between the U.S. and China. Yes, it’s related to the pandemic, but it’s based on deep-seated antagonism between the two countries that has been brewing for years and threatens again to become a differentiated risk of its own. This is especially true if it leads to another round of protracted trade negotiations. In fact, over the past couple of weeks, there have already been a few trading sessions impacted by the deteriorating U.S.-China relationship.

“There’s also the U.S. election to think about. Again, it has taken a back seat to the pandemic, but as we get closer to election date, it’s bound to become more of a focal point with investors.”