Investors did not take long to run after the scare that the United States Federal Reserve (Fed) gave them, after making it clear that he has no time to cut interest rateswith which global financial markets entered a phase of turbulence marked by a series of key factors that dominate the panorama.
After months of hoping for a soft landing (that is, a slowdown in inflation without triggering a recession), investors were surprised by the Fed’s strong signal last week that it is willing to keep interest rates on hold. higher for longer than anticipated, as has been the forecast for this space from the beginning.
The news caused a sharp decline in the US stock markets, to such an extent that it almost erased the accumulated gains so far this year, but it also uncovered a revealing situation, as analysts warn that the seven largest stocks in the benchmark index S&P 500 have seen an increase of more than 50 percent from January to date, while the other 493 have had virtually no notable changes.
This means that those who decide to invest in the S&P 500 today are putting their money in a handful of companies, which have an average price-earnings ratio (PER) of 50.
Tony Pasquariello, an expert at the influential bank Goldman Sachs, notes that the last week has been particularly challenging for the highest-performing stocks, which he calls the “Magnificent 7,” whose share prices faced significant difficulties, raising questions about the sustainability of its growth.
But the factors that dominate the market landscape are not limited to the US, as there are various concerns globally, for example:
- Interest rates in most developed markets are reaching cycle highs, with special attention in the US. This rise, particularly at the back of the yield curve, is casting a longer and longer shadow over the markets.
- The recent rally in oil prices is challenging several widely held views, such as the idea of a soft landing in the US or the presumed end of the European Central Bank’s (ECB) tightening cycle.
- Despite a steady stream of economic policy announcements, Chinese stock markets continue to struggle to maintain a sustainable rally, adding volatility to global markets.
- On a more positive note, recent weeks have marked a return of confidence in the capital markets, setting a more optimistic tone for the next phase of the funding cycle.
- Although perhaps short-lived, third-quarter gross domestic product (GDP) grew 3.2 percent, indicating some stability in the global economy.
But all of these factors combined have left stock markets in a delicate situation, with continued technical damage in the hands of weaker investors.
Amid this uncertainty, it is possible that the abrupt decline will continue in the short term, warns another Goldman Sachs analyst, Scott Rubner, although he is also optimistic about a subsequent climb to close 2023.
Looking forward, Rubner expects S&P 500 price performance in October to be volatile and complicated, similar to Augustalthough he retains hope that the fourth quarter will bring a final upward push, since financial markets “have the potential for a rebound.”
Likewise, Michael Hartnett, CIO of Bank of America (BofA), also warns that the stock market will fall after seeing the results of the “magnificent 7”. In his view, performance has been mixed, with some indicators pointing to a possible correction. That’s why he advises “selling the latest rate hike” from the Fed, which could signal an economic slowdown.
In Mexico, inflation will remain high due to the fiscal deficit
In this bearish financial context, it is worth noting what is happening in Mexico to foresee the probable scenarios that the near future will bring.
Let us remember that the 2024 Economic Package proposed by the Ministry of Finance predicts the largest deficit in public finances since the late 1980s, an element that could complicate the task that still remains to be done by the Bank of Mexico (Banxico). Let’s explain.
While Banxico maintains a clearly restrictive policy, the federal government will exercise an expansive budget that will increase aggregate demand (the goods and services purchased by households, companies and the public sector), which – in turn – would cause upward pressures on prices.
What this anticipates is that it will be difficult for the Banxico Governing Board to cut interest rates (as it should to deflate the peso bubble) and, on the contrary, to give signals that the pause in interest rates is going to be longer than we had originally thought.
This situation poses a complicated scenario for Banxico.
If higher public spending materializes, the Treasury would be interfering with the central bank’s fundamental task of keeping inflation under control.
It is therefore a difficult moment that will be experienced in 2024 with two authorities pulling the rope of prices in opposite directions, and in which the only real losers will be the citizens and our purchasing power.
Editor’s note: This text belongs to our Opinion section and reflects only the author’s view, not necessarily the point of view of High Level.
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William Barba Master in Economics from the Austrian School; liberal, gold market specialist and editor of the investment newsletter Top Money Report