This is the question that equity markets are asking themselves, after the good year 2023. Indeed, the Dow Jones rose by 14%, the CAC 40 by 16%, and the German stock market, the DAX, by 20%. And this despite the concerns that emerged at the end of 2022. Can this continue?
To answer this question, we need to look at the five parameters that have made this success possible, asking whether it can continue.
The first parameter, which is positive, is that of the technological revolution. The one that allowed Apple to rise by 50%, Amazon by 80% and NVIDIA by 240%. Answer: Yes. There is no reason for this movement to stop: the proof is Tesla, whose market capitalization reaches 800 billion dollars, twelve times Stellantis, for a P/E ratio between 60 and 70 compared to 4 to 5 for the “old” French company. The stock market loves innovations and entrepreneurs, even if they are excessive.
Wars, inflation, climate: a cocktail of uncertainties
The second parameter, which is also positive, is that of the fight against climate change, after COP28, which reinforced the search for substitutes for oil. Artificial Intelligence will help innovation everywhere, against droughts and floods, to change housing, mobility, the office, the city: fantastic new markets!
The third parameter, which is still positive, is the success of central banks in fighting inflation. Of course, they were surprised by its sharp rise, but they reacted by raising their interest rates quickly and sharply. Today, prices are rising by only 3.1% in the United States and 2.4% in the euro zone. With short-term interest rates at 5.5% for the former and 4.5% for the latter, we can think that we are done with the hikes and that the cuts will follow. This is also the idea of long-term rates, which are falling everywhere. All of this is obviously good for the stock market.
The fourth parameter is negative. We are in the middle of wars, after the ongoing war in Ukraine, as long as it is financed by the United States. Then comes the one between Israel and Gaza, which we don’t know where or when it will end. This series is not over, if we think about what is happening in Africa, in Venezuela, which is watching very closely its neighbor Guyana, sparsely populated but very rich in oil, not to mention the questions we constantly have about China about Taiwan, a few days before the presidential election on the island (not to mention North Korea). In 2023, the markets were dealing with only one war. Today they are multiplying, more dangerous, longer, more expensive, more uncertain, more mixed.
An election year around the world
The last parameter is the one on everyone’s mind: the U.S. presidential election. The selection of candidates by state continues, with some refusing to include Trump in the wake of what they call: the attempted subversion against the Capitol. But it all depends on the Supreme Court, which, for the moment, is considering… It is not until the middle of 2024 that we will know what will happen. Markets think Trump will always be there, so does Biden. In fact, even if they don’t say so, they are looking for a strong man to lead the world’s leading power, in a world that has never challenged it so much. They prefer the simplicity of force to the complexity of reflections. In this context, their optimistic forecast could be more easily continued.
Of course, there are other parameters. In addition to the election in Taiwan, we have to wait for the one in Moscow, which is more easily predictable… and the one for Europe, which can weaken its momentum. Basically, markets may think that technological revolutions and successes against climatic variations, linked to falling inflation, are the bets to be pursued. For politics, which will be decisive in 2024, they should continue to bet on Trumpian strength and simplicity. This is not necessarily reassuring, but we don’t have much else.
