While inflation data in the United States for January is still at 3.1% – worse than the market expected – both the S&P 500 and the Nasdaq technology index are at their historical highs, near 5,000 and 15,900 points, respectively. In Europe, the EuroStoxx 50 and the indicators of Germany and France are at unprecedented levels, with London close by and the world indicator, the MSCI World, walking on unpaved ground. To top it off, the VIX volatility indicator is at 14, suggesting that the market is not scared of stocks despite these milestones.
The questions that concern investors are: Are these highs a good time to enter the stock market? Is it time to collect winnings? Given a price drop, would it be interesting to bet on bearish strategies? The expected decline in interest rates, the progress of the economy (recession or soft landing) and the development of corporate profits must answer these questions in order to know whether we are in expensive markets or in markets that still offer profit potential. More profits. “The market has quickly raised expectations that inflation will fall, that we will avoid a recession and that the Federal Reserve will cut interest rates soon, and it only takes a few disappointing variables for a market correction to occur, and “The fact that “It is an election year in the US, which brings with it a certain level of uncertainty,” explain Mario González and Álvaro Fernández, Business Development Directors at Capital Group for Iberia.
There are some stock market-specific elements that could prolong this euphoria. Many managers decided to seek refuge in the money market in 2023 because they were convinced of an impending recession in the United States, which never happened, and therefore want to make amends for the mistake made. This abundant liquidity must emerge. Kevin Thozet, member of Carmignac's investment committee, comments: “One wonders where these assets will go if the returns on monetary benchmarks become less attractive. Our thesis is that stocks will benefit,” he concludes. Additionally, Wall Street's 2023 surge focused on technology's so-called “Magnificent Seven,” ignoring the smaller-capitalization companies that can now continue the rise.
Andrew Paisley, director of small caps at Abrdn, advises investors to “look further down the cap scale” in these high markets. And Mark Sherlock, head of U.S. equities at Federated Hermes Limited, points out that valuations of small and mid-cap companies “are much more reasonable, trading at a 30% discount to their larger-capitalization peers.” she noted). with a 10% markup,” he explains. Michele Morganti, senior equity strategist at Generali AM, also recommends smaller stocks in both Europe and the US for investors suffering from altitude sickness due to the performance of the indices.
Managers and analysts like to use similar situations from the past to make their forecasts. Jaime Raga, head of client relations at UBS AM, points out that the MSCI World Index's 15.8% return in the three months to January last year was only due to “the dot-com bubble, the end of the recession-induced bear markets.” and the successful further development of vaccines, which enabled the beginning of the return to normality after the Covid-19 pandemic.” And he adds: “We believe that it is time to interrupt the historically strong equity rally.”
The so-called fear index VIX is at a very low level: investors are betting on an increase
A contrary view is taken by Duncan Lamont, head of strategic analysis at Schroders, with a study of peak periods in the US stock market since 1926. “Of the 1,176 months that have passed since January 1926, the market reached an all-time high.” in 354 of them, 30% of the time. And on average, returns in the 12 months following an all-time high were better than at other times: 10.3% above inflation, compared to 8.6% when the market did not peak,” he explains. And he adds: “There may be valid reasons not to choose stocks, but the market at all-time highs should not be one of them,” he concludes.
Taking a much closer look at time, Virginia Pérez, investment director at Tressis, highlights the 22% increase for the S&P 500 from last October's lows and 14% for the Stoxx600, respectively. “Now is the time to wait or take very selective positions. The different behaviors between stock markets, industries and company sizes create long-term investment opportunities.” Given the good economic data and the general price consolidation at the beginning of 2024, with the exception of the euphoric technology, this expert is cautious about the market regarding a possible price drop. “Instead of taking an aggressively pessimistic position, we prefer to take cautious profits,” he concludes.
Choose bag
The dizziness of the peaks reached in stocks varies in severity depending on the market. Analysts agree that American stock markets are more expensive than European ones, but this does not simplify the choice either: there are different opinions. Manager Janus Henderson says European stock markets “continue to be attractively valued relative to American ones, presenting a unique opportunity for investors.” And analysts at Goldman Sachs point out that Europe's valuation has risen 13-fold in recent months on a P/E ratio (times the price includes earnings per share), “although it is still at a steep discount compared to the US and they expect increases of around 9%. over a period of one year.
Although manager Edmond de Rothschild remains neutral on investments in stocks, his investment manager Benjamin Melman this month reiterated his commitment to the Old Continent: “Investors are not only overly pessimistic about Europe, but also that European stocks would benefit if it would be.” “A surprise global recovery and secondly, the resilience of the US economy could pose a problem for the Federal Reserve over when and by how much to cut interest rates, but the BCE has room to maneuver as the economy has stabilized “, he explains. Michel Morganti reiterates his bet on EU stock markets, “cheaper than US stock markets, but we keep US companies in the information technology sector at neutral as they continue to be well supported by higher earnings momentum,” we explain.
Europe is cheaper than the US, but analysts are divided on which option is best
At Bank of America, they expect a significant 20% correction in the Stoxx 600 in the first half of the year based on “weak economic data and renewed inflation fears,” and then expect a slight recovery by the end of the exercise. Mabrouk Chetouane and Nicolás Malagardis, strategists at Natixis Investment Managers Solutions, are euphoric about the United States as “there is a high probability that the United States will land softly thanks to resistance from domestic demand; the expectation that technology sector revenues will continue to increase; and finally, the belief that the next interest rate cut will support growth.” And they add: “In Europe, we are not where we are due to the fragility of the growth outlook, which affects income expectations, and the lack of clarity on the monetary and policy fronts in the same situation.”
The fear of the highs is not yet reflected in the prices, as the stock markets continue to boast of new highs. But stock market corrections are almost never announced. Selecting and rotating securities and stock markets can be a good strategy in a seemingly complicated year.
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