The primary international stock market indexes, in essence, continued the lateral movement that began in the aftermath of the mini banking crisis of early March, recording modest trading volumes and low volatility.
This dynamic can be explained by recalling that at a fundamental level there are two macro variables that investors try to discount, the inflation trend and the prospective economic trend, which are strongly correlated with each other. Maintaining the working hypothesis of being in the presence of a technical phase of accumulation of the indices, the rate of inflation in developed countries is perceived to be slowly but constantly decreasing while the conviction prevails that the individual economies, with the due distinctions, can materialize a soft landing thereby avoiding a real recession.
In May, the inflation trend on the opposite sides of the Atlantic Ocean recorded a convincing decrease, also due to the base effect, which should allow both the FED and the ECB to pause for reflection on any further rate increases. Furthermore, the main driver of inflation, the price of oil, has fallen by 10% year-to-date in WTI terms, and OPEC again appears intent on reducing production quotas as the disappointing recovery in Chinese demand, heralds a further drop in the price of a barrel towards 60 dollars. Universally, the deglobalization following the pandemic experience is only partial, so the deflationary forces that characterized the last decade are still present.
The cyclical aspect appears to be the least worrying in the perception of the stock markets, since the phase of concrete credit restriction by the central banks, that relating to the contraction of the total of their respective balance sheets, ended last November, while the positive stability of employment levels favored by the gradual reopening following lockdowns, supports the soft-landing hypothesis. Regarding the end of QT that characterized 2022, it should be noted that the Fed’s balance sheet went from 8.5 trillion dollars last May to the current 7.8 and that, in any case, since January 2022 the reduction has been only one trillion dollars, signifying the practical impossibility of restricting credit in the face of the enormous world debt. If international investors don’t seem too concerned about a possible recession, the same cannot be said for insiders whose consensus forecasts see a recession for Western economies starting in the autumn quarter. This forecast had already been made for the end of 2022 and turned out to be wrong for the same reasons that the current estimate will also be wrong. In fact, the econometric models currently used and the historical series that have followed since the Second World War are not very reliable if applied punctually given that the great financial crisis of 2008/09 was managed using extraordinary economic instruments which then became ordinary; think of a decade of cost of money tending to zero and below zero. Hence the definition of “New Normal” economy coined in 2010 by the US economist prof. Gross, which after the effects of the pandemic has now found the new definition of “Next Economy”.
Therefore, in order to predict future economic dynamics, a pragmatic rather than a theoretical approach must be followed, which evaluates, to name a few, the long-term consequences of post-pandemic reopening such as the resilience of employment, the acceleration of digitization processes and the use of ‘artificial intelligence, the change in course of Chinese monetary policy after last November’s Party Congress, the impact of the gradual decline in the cost of money on capital-intensive sectors, the consequences on monetary policy of the recent mini banking crisis, the heavy debt burden of all the primary countries which in the event of a decrease in tax revenues would become the next issue to be resolved by the central banks and so on. Therefore, if inflation recedes and the economic situation holds, the stock market indices could still record a small starting rally in the short term, which in terms of the S&P 500 index could have a target of 4400 points, while on the contrary this hypothesis would be repudiated only if support at 4150 is broken. In depth, the tech sector appears to be heavily overbought, while cyclical and banking sectors present a certain medium-term potential.
Nicola Bravetti Data Source: Bloomberg
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