The stock markets are flying with record numbers never reached before and investors are celebrating. With just one question: is it all true? In recent days the European and American markets have reached highs and the rally that began in the autumn seems to never end. But what's real behind the records? And will this euphoria be paid for?
Let's start with the numbers. Yesterday Wall Street closed at historic highs, exceeding 40 thousand points. The performance came after the release of consumer price data, which showed inflation falling in April. Record closing on Tuesday on Piazza Affari, which exceeded 35 thousand points, updating the maximum reached in 2008. And so did other European stock exchanges: Frankfurt gained +12.8% since the beginning of the year, Paris +9.5%, London +9.6 %.
The reason for the records? “The data on inflation at a global level confirm the downward scenario, even if over a non-immediate period of time. Consequently, operators' expectations on monetary policies have become optimistic, the forecast is consolidated that central banks, after the period of very high interest rates and restrictive monetary policies, will now decisively take the path of rate reduction”, explains Paolo Manasse professor Macroeconomics University of Bologna. The much feared danger of recession therefore seems to have been averted and the immediate rate cut (in June for the ECB and in September for the Fed) is increasingly concrete. “Financial markets depend not on what has already happened, but on expectations about the future. If the prospect of a rate reduction consolidates, it becomes more convenient to invest in the stock market. If expectations are for a reduction in rates, it is natural for the stock markets to celebrate, because they are waiting for the stock market indices to rise. Everyone buys today, to then have shares whose prices increase,” continues Manasseh. Also driving the price lists is a season of quarterly reports that is going beyond expectations. In the United States, nearly 8 out of 10 companies beat forecasts, with profits increasing by an average of 5.4% versus the expected 3.4%. In Europe 58% exceeded estimates. And to this we add the liquidity issue, which is good for the stock markets. Since October when the market rally began, it has gone from 100 thousand to 104 thousand billion dollars
A bubble to fear or real growth? “It's growth that doesn't depend on the fundamentals of the underlying companies improving dramatically. You no longer buy shares of company X because you expect it to make who knows what big profits in the future. But when rates fall, economic growth generally improves: more is invested, more is consumed, companies have less interest to pay. It is a general improvement in the economy, induced by the reduction in rates, and the stock market moves accordingly. Therefore it is not a purely speculative trend, it is real because it derives from something true, but not from the real improvement of individual companies”, warns Manasse. Of course, historically we are accustomed to excessive optimism or pessimism on the stock markets. And the fear is that we may pay in the future. “Financial markets usually exaggerate, for better or for worse. It is very difficult to say today to what extent there is some unjustified euphoria and how much is justified by the wait for the rate reduction. Financial markets operate as bets on the future, we need to see if they are realistic. As long as the markets are doing well, it is worth buying, because prices continue to rise. But when they stop rising, someone will certainly be left holding the hot potato… It's always like this, which is why it's always better to buy when the markets are going badly”, replies Manasseh.
All that remains is to wait for the next decisions of the central banks. Expectations are growing that the first cut will be made by the ECB in June, while for the Fed it is now expected in September. A first step, even if the road could be long, always dictated by the inflation objective of 2% and with all the heavy geopolitical unknowns looming. “In theory, nothing should happen on the stock market with the rate cut. In fact, if the reduction is exactly what the markets expected, nothing sensational will happen. Expectations are already incorporated into the prices on the price lists. However, if rates fall less than expected then the market will fall. And if rates were to fall more than the market anticipated, then prices will go even higher,” concludes Manasse. In short, rates and monetary policy remain the driving force behind everything, today and tomorrow.
