The statement made by Andrea Delitala, who is the Head of Investment Advisory at Pictet Asset Management, on the positive stock performances in the United States of America, Europe, and Japan
February continued to be a very favorable month for the financial markets, as seen by the generous stock performances of 5% in the United States, 7.5% in Europe, and 10% in Japan. These performances were supported by strong fundamentals, particularly in the United States, as well as good corporate results, particularly for businesses in the technology sector.
Positive stock performance in Japan, Europe, and the United States of America
The Head of Investment Advisory at Pictet Asset Management, Andrea Delitala, writes this in a lengthy analysis in which he emphasizes that “bonds have undergone a correction for the same macroeconomic reasons and for the consequent wait-and-see rhetoric of central bankers.” However, he notes that the correction did not infect the risky asset classes, as it had occurred in the autumn. For instance, rates on two-year Treasury notes increased by around half a point, while yields on ten-year Treasury notes increased by 35 basis points. Movements that, on the other hand, emerged in a significant way during the first few weeks of March.
The expert continues by saying that the calmness of the markets is also due to the following interpretation of the new information regarding the cycle and monetary policy: on the one hand, the strength of the economy is considered to be partially temporary, given that some support factors will run out over the course of the next few months; on the other hand, both the Federal Reserve and the European Central Bank have effectively confirmed their willingness to initiate the downward rate cycle, even though they have asked for more time to begin it, subordinating it to a greater conviction in the process of disinflation.
An increase in the stability of salaries and, consequently, of the labor market, which appears to be taking place at the moment, can be linked back to this phenomenon in some way. Regarding Europe, it is highly probable that we will likewise observe a stability of earnings.
Banks of Central America, “Wait and See”
“They seem distant, and the market currently seems to be solely focused on recalibrating the timing of interest rate cuts,” when asked about the most severe fears of stagflation similar to that which occurred in 2022. The European Central Bank (ECB) has set four rate cuts for the year 2024, while the United States has set three rates for the year 2024, which is in line with what was announced by the Federal Reserve in December. In accordance with the expectations of the market, we anticipate the first rate decrease to take place in June, mostly from both of the main central banks.
At the Federal Reserve’s next meeting, which will take place on March 20, there is a possibility that the Fed could reduce its prediction to only two reductions. An element that demands knowing what economic, technological, and geopolitical scenario will take shape when the dust of this post-pandemic economic cycle settles is the question of defining the terminal arrival point. This is a question that will be difficult to interpret since it is an element that requires comprehension. There is a diminishing number of individuals in the market who continue to have reservations about the disinflationary process, and there are fewer and fewer doubts that we are already over the key phase. The majority of people now support the gentle landing scenario. In the long run, the remaining uncertainties mostly concern the moment at which real and nominal interest rates are in equilibrium with one another.
When it comes to the landing point, also known as the neutral rate, “there is a certain nervousness in the debate among economists and within central banks.” On the one hand, the significant impact that technological innovation has had on workplace productivity may result in an increase in the value of long-term interest rates. These rates would be set at a value of approximately one percent in real terms, which means that they would be adjusted for anticipated inflation.
This is in contrast to the value of 0.5% in the United States and something above zero in Europe. These numbers are confirmed by the most recent projections, which were published in recent days by the Federal Reserve and other research institutions. These estimates are even somewhat higher than these rates. This aspect, along with other factors, could translate into a brake on potential growth and possibly also in a greater persistence of inflation, certainly in a more antagonistic trade-off between profit margins and unit labor costs. On the other hand, some people, including Isabel Schnabel, observe that Europe is a step behind in adopting measures to improve the efficiency of its production structure. This is a position that Europe is currently in. These uncertainties regarding long-term balances and rates provide justification for the unusually high volatility that is currently present in long-term rates.
Over the next two weeks, what can we anticipate happening?
A trading range in bonds or further slight declines in yields, towards 4% in the American ten-year bond and 2.25% in the German Bund, assuming the inflation figures maintain the downward trend, is the best case scenario, according to Delitala, who continues: “The best case scenario is a trading range in bonds.” If this scenario plays out, there is a possibility that the performance of the stock market may shift from the technology sector to the other indices and possibly even healthcare.
In a scenario that is less favorable, it is not possible to rule out the possibility of a somewhat more dramatic correction of the stock indexes. This correction would come after many weeks of recovery: from the lows that occurred in October, the recovery of the stock markets of developed countries varies from twenty percent to thirty percent in Europe and Japan. Emerging markets, on the other hand, only recorded 12% expansion. However, in this particular scenario, bonds ought to be able to provide some degree of protection to the portfolio, just as the dollar ought to be able to do so following its recent decline around 1.10.
Some of the potential outcomes
In general, “the correlations between the two primary financial assets, stocks and bonds, show signs of improvement,” which means that there is a more contrasting daily trend, which contributes to the stabilization of a portfolio that contains multiple assets.
In spite of the fact that this is undeniably a sign of optimism, we believe that in order to be able to rely on complete normalization, it will be required to put this specific economic cycle in the past for good. In conclusion, Bitcoin and gold, which were the main attractions in the months of February and March, respectively, are, in our opinion, indicators that are slightly concerning and suggest that the market may be experiencing an excessive amount of enthusiasm. In any event, the performance expectations for the medium term and for the present year continue to be optimistic, with returns anticipated to range between five and ten percent for balanced strategies.
It is said that the facts, views, and estimates that are included in the paper “reflect an opinion expressed at the original date of publication and are subject to risks and uncertainties that could cause actual results to differ materially from those presented here.” This statement is highlighted in the text.
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