The economy is squeaking and creaking, but the stock markets are celebrating. The Amsterdam stock exchange has even had the best start in fourteen years.
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It is unprecedented what is happening. I had expected some reaction to last year’s sharp declines, but not so sharply
It is especially a party on the European and Asian stock markets. But where does this jubilant mood – in Amsterdam the AEX gained more than five percent in the first week – come from? The economy is probably already in recession and central banks worldwide say interest rates will rise even further in the fight against inflation. Exactly those two things caused the stock markets to collapse last year.
So what has changed that investors are now enthusiastically shelling out more money for stocks? ,,It is unprecedented what is happening”, Corné van Zeijl, fund manager at asset manager Actiam, looks back on the first week of the stock exchange. ,,I had expected some reaction to last year’s sharp declines, but not so sharply.”
Yet there is an explanation for the optimism, namely falling inflation and the hope that the economy will recover. ,,Inflation is falling, especially in Europe”, says Van Zeijl. And if inflation falls, there is less reason for central banks to raise interest rates. “And investors are pricing in the lower interest rates,” says Ralph Wessels, head of investment strategy at private bank ABN Amro MeesPierson.
Increase interest
The European Central Bank (ECB) and the Fed, the American central bank, are expected to raise interest rates in the coming months. “But in the second half of the year, investors expect interest rates to fall from the Fed,” says Wessels. “We also expect an interest rate cut from the ECB.” Lower interest rates are good for equities, and that explains the rise in prices.
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The markets are normally better predictors than the central banks when it comes to interest rates
This optimism among investors contradicts the statements of the ECB and the Fed. They maintain that interest rates will remain high for a long time to come, until it is certain that inflation is under control. “The markets are normally better predictors than the central banks when it comes to interest rates,” says Wessels. In other words, the words of the central bankers make little impression.
Wessels also expects lower inflation. “Raw materials are falling in price, so is energy. High energy prices were an important cause of the high inflation. To get energy inflation that high again, a barrel of oil would have to cost $200. Now it’s $80. And look at the transport rates for containers, they have also fallen sharply.”
Fight with inflation
Van Zeijl doubts whether the optimism among investors is justified. “The Fed really says they will not cut interest rates.” The fund manager is also not convinced that the battle with inflation has already been won. He points to the rise in wages, particularly in the US. “That leads to structurally higher inflation.”
The price increases also seem to contradict the economic situation. Interest rate rises are slowing down the economy, and there is a good chance that both the US and Europe will end up in a recession. “I expect corporate profits to be disappointing in 2022,” says Van Zeijl.
Wessels is more optimistic. “You can see that business confidence in Europe is rising. This may indicate that we in Europe are quickly leaving the low point in the economy behind us.”
Good news
But even bad news is translated as good news by investors. Because if the economy cools down, it is expected that this will lead to lower inflation. And that lower inflation means a faster fall in interest rates.
Whether that plane will fly is still unclear. If inflation remains high, and with it interest rates, the recession will deepen. Then sentiment can quickly turn around and shares are hot croquettes that nobody wants to burn their fingers on.
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