Is the positive performance of the stock market likely to continue? “To understand this, we need to analyze the reasons for the increases,” he explains Alessandro Fugnoli, Kairos strategist, in the last episode of the video column On the fourth floor.
“Let's start with three factors – continues the economist – The first is the combination of the US-China negotiations on tariffs and the UK-EU on Brexit: both negotiations created volatility on the markets, but their weight can be quantified in a 4-5% increase or decrease depending on the progress of the negotiations. At the moment they are doing well, but clearly this is not enough to explain a year-to-date increase that exceeds 20%”.
The second factor most taken into consideration by the operators is the trend of economic growth, “which has actually decreased in the last year – continues Fugnoli – A year ago the USA was growing at a rate of more than 3%, while today it is at 1%. The EU was in stagnation, almost a recession, and is still in the same situation today. Asia has also slowed down. So even this factor does not explain the market trend”.
For corporate profits, the Kairos strategist notes that "in the United States they are slightly lower than a year ago, while in Europe they are slightly higher". Another hole in the water.
So how do you explain the rise in the markets? According to Fugnoli, the real reason must be sought in the "monetary policy, Both for the rate cut, both for the recovery of the Quantitative easing. A year ago, not only were rates in America three quarters of a point higher, but expectations were for further increases. Then came three rate cuts. In addition, Qe has resumed in the US – in a slightly different form than in Europe, but it is still Quantiative easing – while a year ago we were in Quantiative tightening, i.e. the Fed withdrew liquidity from the market”.
Now let's go back to the original question: Will the hike last? “The main factor, that is the monetary policy, it will not change – replies the analyst – even if the GDP accelerates again. As for the to evaluate, a modest recovery is expected, as is the trend in theglobal economy. These three factors indicate that the market should hold the positions it has acquired and perhaps improve them further in the coming months".
There is though a negative factor that the market will only begin to discount from the second half of next year: “It is about thepolitical uncertainty linked to the US presidential elections – concludes Fugnoli – which brings with it the possibility that the leading country of world markets will radically change its economic policies. This will create volatility and perhaps stop the rally, but conditions are still favourable, for now."
