Financial markets are flying from record to record. How far, and is it at the risk of creating an explosive bubble? Jean-Paul Betbeze explains why the world’s major stock markets will continue to rise despite the many questions related to the tense geopolitical context on the international scene.
No rate cuts at the Fed and ECB: the stock market will have to wait! The CAC 40 has exceeded 8000, beating its highest of the year in a few months… 2000 (6944 on September 4): it took him years! But it has been moving away from its recent high at 8250 or so for the past few days. The Dow has also passed its 2008 peak of 15,000. It passed 40000, but here it is again around 38400. Will the CAC 40 and Dow Jones continue their declines or resume their rises? Five explanations.
Monetary Policy and Innovation
One: for prices to go up, you first need money. There are. Monetary policies have been generous in their efforts to get out of Covid, at the risk of a rise in inflation, which they have taken. As this inflation subsides, slowly, they are preparing to cut rates, which is good for the stock market. In the eurozone, this could be the case for the ECB at the end of the semester or year, and later for the Fed, when both will be more certain of disinflation. The ECB remains sensitive to services prices and the Fed is worried about the strength of the labor market with 303,000 new jobs in February, compared to 270,000 expected.
Two: there must also be good technical reasons. There’s nothing better than the ongoing technological revolution, with news jostling and shaking up hierarchies. With ChatGPT, Nvidia has tripled in one year, almost doubled since January, with the idea that the champion will win the day. Today, it is only a question of the new architectures of computers, and therefore soon of companies, with fewer hierarchical levels, stocks, surface areas, and therefore more profits for those who act first. The big ones? The monopolies of tomorrow?
Uncertainties: Conflict and Climate
Three: and also some not so good. Wars are knocking on doors in Ukraine-Russia, Gaza-Israel, and then spreading. In this context, the United States and then Europe are trying to regroup their forces, realizing the fragility of the production chains that made the multinationals of yesterday. It is no longer a question of being multipolar, but “well” bi- or tripolar: the cards are being reshuffled. There will be fewer alliances, more big winners. Hence the bets on companies that produce in the major industrialised countries or safe friends and neighbours, countries where industrial policy and protectionism are no longer dirty words: the United States, for example. Obviously, this means not forgetting the research, cyberwarfare and armaments industries, which are increasingly popular.
Fourth: it is in this technological revolution that climate change is entering. Against all this, huge investments will be needed. So, here again, a polarization on “tech” and its stock market values that takes on the appearance of a “solution to everything”, like electricity in its time.
Risks of disillusionment
Five: if in doubt about the few winners that will drive the price, here are the ETFs (Exchange Traded Funds). In asset management, this class has been rising steadily for the past 56 months, reaching $1.9 trillion. You will no longer choose stocks (active management), which is complicated and time-consuming, but will make ready-made choices, according to themes: for example, Indian high tech ! The world of passive management is for you. Cohorts (herds?) are formed. You go up with your choice… but vice versa.
Because we must never forget that the increase in titles is pleasant for those who own them. They only look at themselves, forgetting that too much of an increase leads to strong disillusionment. The world is changing: this revolution is leading to a polarization of minds/hopes on NVIDIA today, after Apple yesterday, a polarization that is all the more dangerous because it makes us forget the risks of war. We don’t see them anymore, until one day they jump in our faces.
There is a risk of a bubble from computer stocks when we only see them: we will have to know how to leave them. It’s not all about rates.
