Do The Fundamentals Still Matter?
During times of immense economic uncertainty some fundamentals take a backseat, but they will always matter, find out why.
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We have a question from Duvane who says recently it seems like the fundamentals have had a lot less conviction with a lot of the recent moves surprising a lot of market participants, so basically do fundamentals still matter?
This is a fantastic question Duvane, and one that many investors, analysts, traders and economists have been asking since the inception of the covid-19 pandemic.
Now the important thing to do with this question is to differentiate with what exactly we mean by the fundamentals, because fundamentals can mean different things to different people, for some fundamentals means economic data, for other fundamentals means the global macro drivers impacting asset prices, but from a sentiment point of view it can also refer to the day to day dominant sentiment drivers of asset prices or the macro narratives or themes that are in focus at the time.
So, valuing asset prices usually involves looking at its price and the incoming data and then evaluating whether the current price is in line with its projected future fundamentals.
And, as analysts we look at the incoming data and from there establish a baseline of what comes next, but what comes next isn’t always as simple as looking at the data because what the market should do or ought to do isn’t what the market always does, especially when you have idiosyncratic factors driving asset prices, like the biggest pandemic hitting the world since the Spanish flu which saw the world come to a complete stand still due to nationwide lockdowns.
Right now economists and analysts are in the process of adapting and changing their forecast and projection models to focus on things like high-frequency data instead of the hard data because the hard data is so skewed with all the stuff going on that it’s been difficult for them to track data accurately.
You only have to look at some of the recent ranges on economic data points to see that economists have been out of their depth recently because it seems like that are surprised by every hard data point hitting the wires. I mean just look at the upside seen in something like the CITI Economic Surprise Index and you can clearly see how surprised economists has been.
So, in that sense, the fundamentals don’t matter as much when we refer to the economic hard data that is usually used to establish value, but it’s during these times when other aspects of the fundamentals come to life, which is the global macro fundamentals as well as the current macro sentiment drivers or narratives that markets are focused on.
You see, even though fundamentals in terms of the data is always important, it might not always matter to markets. So, in that sense, the fundamentals always matter, but the market pays attention to different parts of it at various times.
When you have central banks buying so much bonds, whether government bonds or corporate bonds, at this present size and scale, then suddenly the apparent disconnect between asset price performance and the fundamental data start to make sense.
That’s why we also talk about the key Macro themes, we mention them in most of our videos and our daily reports, in almost all our analysis and commentary, because the markets are also focused on specific themes or narratives or stories if you will, that drives asset prices in the short and med-term.
Now that doesn’t mean that we forget the data, it just means we need to adapt to focus on what the market is focusing on. We need to have an OAT’s approach to trading, that means we Observe what the market is focusing on, we Adapt our focus to following the current news that deals with those current narratives or themes and we Trade them accordingly.
I know it sounds over simplified, but it shouldn’t have to be a very complex thing, it all comes down to market expectations at the end of the day. If everybody expects GDP at sub -10% with a massive wide range of expectations, and all the attention is on what the FED will do next, then it makes sense why some of the typical fundamentals haven’t mattered so to speak.
But, there will come a time Duvane where all the attention will be back on Economic Data, and of course how that data feeds into the current market themes at that time.
So, it’s an always changing environment.
We have to adapt, take an OAT’s approach to trading, that means we OBSERVE, ADAPT and TRADE accordingly.
-----
If you find this content helpful, you’ll love Forex Source.
There’s a link below were you can learn more about it
https://bit.ly/2HFykNd
----
We interpret and explain price moves in real-time, 24 hours a day. Our team of analysts produce text, video and audio commentary.
You understand the markets and trade with confidence. Learn more at our website here: https://bit.ly/2HFykNd
-----
We have a question from Duvane who says recently it seems like the fundamentals have had a lot less conviction with a lot of the recent moves surprising a lot of market participants, so basically do fundamentals still matter?
This is a fantastic question Duvane, and one that many investors, analysts, traders and economists have been asking since the inception of the covid-19 pandemic.
Now the important thing to do with this question is to differentiate with what exactly we mean by the fundamentals, because fundamentals can mean different things to different people, for some fundamentals means economic data, for other fundamentals means the global macro drivers impacting asset prices, but from a sentiment point of view it can also refer to the day to day dominant sentiment drivers of asset prices or the macro narratives or themes that are in focus at the time.
So, valuing asset prices usually involves looking at its price and the incoming data and then evaluating whether the current price is in line with its projected future fundamentals.
And, as analysts we look at the incoming data and from there establish a baseline of what comes next, but what comes next isn’t always as simple as looking at the data because what the market should do or ought to do isn’t what the market always does, especially when you have idiosyncratic factors driving asset prices, like the biggest pandemic hitting the world since the Spanish flu which saw the world come to a complete stand still due to nationwide lockdowns.
Right now economists and analysts are in the process of adapting and changing their forecast and projection models to focus on things like high-frequency data instead of the hard data because the hard data is so skewed with all the stuff going on that it’s been difficult for them to track data accurately.
You only have to look at some of the recent ranges on economic data points to see that economists have been out of their depth recently because it seems like that are surprised by every hard data point hitting the wires. I mean just look at the upside seen in something like the CITI Economic Surprise Index and you can clearly see how surprised economists has been.
So, in that sense, the fundamentals don’t matter as much when we refer to the economic hard data that is usually used to establish value, but it’s during these times when other aspects of the fundamentals come to life, which is the global macro fundamentals as well as the current macro sentiment drivers or narratives that markets are focused on.
You see, even though fundamentals in terms of the data is always important, it might not always matter to markets. So, in that sense, the fundamentals always matter, but the market pays attention to different parts of it at various times.
When you have central banks buying so much bonds, whether government bonds or corporate bonds, at this present size and scale, then suddenly the apparent disconnect between asset price performance and the fundamental data start to make sense.
That’s why we also talk about the key Macro themes, we mention them in most of our videos and our daily reports, in almost all our analysis and commentary, because the markets are also focused on specific themes or narratives or stories if you will, that drives asset prices in the short and med-term.
Now that doesn’t mean that we forget the data, it just means we need to adapt to focus on what the market is focusing on. We need to have an OAT’s approach to trading, that means we Observe what the market is focusing on, we Adapt our focus to following the current news that deals with those current narratives or themes and we Trade them accordingly.
I know it sounds over simplified, but it shouldn’t have to be a very complex thing, it all comes down to market expectations at the end of the day. If everybody expects GDP at sub -10% with a massive wide range of expectations, and all the attention is on what the FED will do next, then it makes sense why some of the typical fundamentals haven’t mattered so to speak.
But, there will come a time Duvane where all the attention will be back on Economic Data, and of course how that data feeds into the current market themes at that time.
So, it’s an always changing environment.
We have to adapt, take an OAT’s approach to trading, that means we OBSERVE, ADAPT and TRADE accordingly.
-----
If you find this content helpful, you’ll love Forex Source.
There’s a link below were you can learn more about it
https://bit.ly/2HFykNd
