The first quarter of 2024 is approaching its end, recording a positive balance confirming that the underlying bullish trend that began in October 2022 remains in place, barring inevitable interruptions, such as that of March 2023, induced by the regional banking crisis in the USA.
During these 18 months, which statistically coincide with approximately 2/3 of a prolonged bullish phase of the stock market, the catalyst for the demand for securities was the surprising economic stability favored by the change of course to a more accommodating direction by the monetary authorities, which favored the steady growth of company profits. The last 10% increase of the US S&P 500 index which saw it go from the resistance level of around 4800 last autumn to the new historic high of 5189 in recent sessions, can also be attributed to the conviction of market pundits, that the FED is close to starting a phase of reducing the cost of money, which lies in the range between 5.25% and 5.50%.
Attention must be focused precisely on this working hypothesis, in the sense that the bull market phase in progress benefits from a particular context, with very delicate balances, characterized by a moderately positive economic situation despite the forecasts of recession of the last two years and the expectation of a similar scenario for the next few quarters which would therefore require stimulus intervention from the FED to avoid sparking an economic slowdown. Judging by the following strategic elements, such as the fact that one third of the world’s central banks are accommodative, that net liquidity in the private sector of the economy continues to expand and that investment flows to emerging and frontier markets are on the rise, the thesis would be confirmed that for this year it appears highly unlikely that a recession nor a soft landing of the world economy will occur. But precisely for this reason, in the short term the level reached by the primary stock market indices appears vulnerable, suggesting a tactical reduction of positions. In fact, if it is true that economic stability favors company profits, expected to grow by 8% this year and 6% next year in terms of the S&P 500 index, it is equally probable that the FED, and also other monetary authorities, could incur a serious error of evaluation, postponing, more than necessary, the already widely expected interest rate cuts, which would cause a correction in the S&P 500 index in the second quarter, for example, towards technical support at the 4950/5000 level and possibly, in the absence of stimuli, down to the 4800 level. However, this would be a short-term correction as the growth in systemic liquidity underway since the end of 2022 will likely continue, with plausible ups and downs, until 2025, supporting financial markets, and more.
The key elements of this thesis are the essential contribution of the FED, that of the Chinese Central Bank, the constant cross-border capital flows and the containment of volatility of US government debt which represents the main collateral for debt denominated in dollars. We are therefore in a phase of monetary inflation, not to be confused with consumer goods inflation, even if there is a partial relapse which could, in fact, lead central banks into error by postponing the easing of the discount rate. The recent strong increase in value of assets recognized as an hedge against monetary inflation, such as gold and cryptocurrencies, confirms the validity of the analysis, suggesting their accumulation in the event of a short-term correction induced by a setback in the creation of monetary inflation. On the other hand, the allocation to bonds is ill advised, especially medium-long maturities, due to the increase in the time premium and the volume of new issues. With the US government deficit constantly increasing, the dollar parity could also gradually decrease.
Nicola Bravetti Data Source: Bloomberg
“This report cannot – nor can – be consider a solicitation to invest in financial instruments”