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Traditionally, the most important factors determining the evolution of stock markets were corporate earnings, macroeconomics, and interest rates.

  • Good corporate results pushed stock markets higher, as obviously a company whose profits are growing sees its valuation increase.

  • Macroeconomics affects the overall economic situation: for example, an economic crisis will negatively affect corporate earnings and, therefore, the stock prices of companies.

  • High interest rates push stock market prices down. For two reasons: first, money leaves the stock market to buy debt - which offers a fixed return with fewer risks - and because companies have more difficulty obtaining financing, which reduces their profits.

In recent years, a fourth factor has been added to these, surpassing the other three in importance: liquidity. To overcome the latest crises, Central Banks have flooded the markets with liquidity; and this liquidity has ended up reaching the equity markets (and cryptocurrencies), boosting their valuations. This last factor is considered, in recent years, the most important in determining the future of stock market prices.

For 2024, most analysts agree that stock markets will see rises of 10%. These are the factors they highlight:

  • Falls in interest rates, which will push stock markets higher. The market expects them between March and June; everything will depend on the evolution of inflation. Precisely, the closure of the Red Sea / Suez Canal to navigation and the resistance of inflation to drop the "last steps" may delay this fall.

  • Weakening of the macroeconomic environment in Asia and Europe; for now, the United States is spared from this deterioration. In fact, the IMF has improved GDP growth prospects. However, if they were to be affected by the European crisis, the outlook could be bleak.

  • For now, corporate results are good. But they can be affected by the rise in rates, which can cause financing problems for companies. Large companies seem to be safe from this complication.

  • The most important factor is liquidity. The rise in the last quarter of last year was due, in large part, to the entry of liquidity into the markets by the FED through the repo account, which more than compensated for the withdrawal of liquidity from the balance sheet. But the repo account (which serves to provide liquidity to large companies that deposit assets as collateral) is at a very low level. And, in addition, the FED has already announced that it will close the liquidity window for regional banks this March; this mechanism was created a year ago to help these banks overcome a series of problems that affected them at the beginning of last year. In return, it has announced that it will stop withdrawing money from the market.

To complete the picture, it should be noted that this year presidential elections are being held in the United States. It is unlikely that the FED will take measures that will "derail" the economy or the stock markets this year. We highly doubt that the history of 1980, when interest rates, at a very high level, was one of the factors that sank Jimmy Carter's chances of obtaining presidential re-election, will be repeated.

At H&B, we believe that if there is a relaxation of geopolitical tensions, the Suez Canal is reopened, and we do not have any "black swan" (= negative event with economic scope not discounted by the market), the scenario of moderate rises is the most likely. But, ultimately, everything will depend on the policy of the central banks regarding liquidity, which must be closely followed.

The H&B team.


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