The reopening of China, the fall in energy prices and the slowdown in inflation lead some investors, media and analysts to assume that the worst is over, but unexpected situations could occur that could bring down the stock markets. Hence, in this space we reiterate the warning that the recent rise in stocks and risk assets such as cryptocurrenciesshould be taken with great caution.
Even some mainstream asset managers like BlackRock agree with our opinion, which believes that the markets’ gains came early this year and that investor optimism towards stocks came too soon, ignoring the fact that that the United States Federal Reserve (Fed) is brewing an economic recession that will change market conditions.
Such unsuspecting investors are pinning their hopes on an economic soft landing, falling inflation and interest rate cuts, so BlackRock sees markets vulnerable to negative surprises and unprepared for a recession that yes or yes it will arrive.
“The recent upbeat market sentiment stands on shaky ground,” he warns, predicting a major recession that will hit the world economy in 2023.
Such a scenario is due to the fact that inflationary pressures still persist in the economy, and inflation could easily stagnate above the Fed’s inflation target (which is 2 percent), even at 3 percent.
The problem there is that, despite the clear signs of a recession and economic damage due to the tightening of monetary policy (increase in interest rates and withdrawal of dollars from circulation) by the Fed, investors bet on cuts in the rates by this, which is the most influential central bank on the planet. So it is very likely that later in the year they will end up disappointed.
Mike Wilson, chief equity market strategist for Morgan Stanley, says that this rise in the stock market is a good reason to sell. Investors seem to have forgotten the golden rule of “don’t fight the Federal Reserve”.
The recent rises in share prices are a reflection of the seasonal effect of January and the short coverage after a difficult end of December and a brutal year, the specialist points out in a note, noting that the reality is that earnings of companies are proving even worse than feared, according to the data, especially when it comes to margins.
Wilson says he is surprised by the magnitude of the market’s recent advance, although he cautions that it is just another bear market trap, as there may be an explanation for this rise.
The “January effect”, the “window decoration” and the optimism of starting a new year are some of the possible explanations that Morgan Stanley gives to the gains of the stock market.
Strategists at this global financial services firm warned earlier this year that a recession shock in 2023 could lead to another drop in stocksof 22 percent, and expected the large-cap index to end the year at 3,900 points for the S&P 500.
On the other hand, according to stock market guru Jeremy Grantham, markets should expect future falls, as he anticipates that the S&P 500 will fall 20 percent at the end of 2023 and 40 percent since the last market peak in January. of 2022. We agree.
And take note: if the market overcorrection is worse than expected, shares could plunge as much as 50 percent from their previous high.
Grantham also warns of a bursting of the global real estate bubble, and ensures that real estate busts may take longer to influence the economy than other stock market crashes.
For example, even real estate markets that were previously considered “impregnable”, such as in Canada and Australia, have begun to decline under the weight of interest rate hikes around the world.
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The warning is done!
Market volatility is ideal for gaining short-term trading through quick buying and selling. That is the great virtue of the wide fluctuations that will occur this year in the financial markets. However, beyond the “noise” that this volatility creates, major downtrends remain intact because the fundamentals that gave rise to them remain unchanged.
Inflation will continue to be the leading “fire” that the Fed and central banks seek to put out with rate hikes and restrictive policies, even if it means seeing risky assets such as stocks and “cryptos” collapse. Anyone who does not want to see this reality is closing their eyes, and doing so in the investment world only leads to huge losses that we must avoid.
Editor’s Note: This text belongs to our Opinion section and reflects only the author’s vision, not necessarily the High Level point of view.
William Beard Master in Economics from the Austrian School; liberal, gold market specialist and editor of investment newsletter Top Money Report