With stock markets being extremely volatile in recent weeks, it feels as though there's an ongoing battle between bullish and bearish investors. Each side is attempting to dominate the other's viewpoint in terms of how the future will pan out for markets, with the two being completely opposite in how they view the prospects for the global economy.
At the time of writing, there's no clear winner and investor sentiment seems to be swaying wildly between the two different camps. Looking ahead, this situation seems likely to continue, but in the long run which side will win?
Follow the bear?
Clearly, bearish investors believe that the world is on the brink of another major recession. There are a few key reasons for this and it has made many investors believe that we're heading towards a perfect storm.
Firstly, the US is in a new era. It's no longer maintaining interest rates at rock bottom levels, but is rather in the process of a period of monetary policy tightening that could have a severely negative impact on global growth, according to bearish investors. They feel that consumption will be constrained due to the reduced availability of credit and businesses will see their profits hurt by higher debt interest costs.
Secondly, China is slowing down. It may be growing at around 7% per year, but according to bearish investors slowing growth is a taste of things to come. They think that China has a weak financial system that may need recapitalising and that consumers will fail to pick up the slack from reduced capital expenditure, which has previously sustained high rates of economic growth. As a result, bearish investors believe that deflation will soon become a reality across the globe.
Thirdly, there are still concerns surrounding the Eurozone economy and the health of its banking system. Although the ECB recently sought to reassure investors about the capacity of European banks to withstand a prolonged downturn, bearish investors are still nervous regarding their prospects. And with the price of oil also hurting an important sector for a number of countries across the globe, it's clear that bearish investors believe they have a lot to worry about.
Bulls in China's shop
Bullish investors, of course, don't deny that there's a great deal of uncertainty and the potential for economic challenges moving forward. However according to them, US economic data indicates that the world's largest economy is performing well, while the pace of interest rate rises by the Federal Reserve is set to be extremely slow.
Similarly, China's soft landing has been reported for a number of years and while the country is enduring a slowdown, it's in the midst of a transitional period that could lead to exceptionally high levels of growth in the long run. Furthermore, the Chinese consumer boom may only just be getting started and bullish investors may see some short-term pain, but a huge amount of long-term potential gain.
And while Europe continues to offer a slow rate of growth, the introduction of quantitative easing is likely to boost its growth profile. Meanwhile, bullish investors are also optimistic regarding the prospects for clean energy and the growth in demand for all forms of energy from a developing world over the coming years.
Time to buy?
Clearly, the two views are hugely divergent and in the short run it seems as though the stock market will switch between them depending on economic data and statements released by key players such as Janet Yellen.
However, in the long run, it seems likely that the current problems faced by the world aren't insurmountable and are, rather, to be expected. For example, the US can't maintain an ultra-loose monetary policy in perpetuity. Plus China's transition was never going to be a smooth one, Europe is also in the midst of a transition, and the oil price is a result of supply and demand factors that are likely to return to equilibrium in the long run.
As such, for investors who can take a long-term view and live with the ongoing volatile battle between bullish and bearish investors, now seems to be a great time to buy shares.
Peter Stephens has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Apple. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.