Why do stock markets rise?


Stock markets on new highs and we continue to point out that the statistical probabilities are for further increases. Somewhere we begin to raise more than one voice by speaking in a derogatory sense of the current movement as a speculative bubble.

Never appellative was more wrong. In a context like the current one where central banks have drained liquidity and low or sub-zero rates in Europe and Asia, where can money be invested if not on the stock market? This is not a speculative bubble but a careful choice to make the most of their money in assets with a risk premium in favor!

Why do stock markets rise?

It should be noted that at current levels many European and Asian stock markets are still undervalued.

The situation of US stock indices is very different. They have been rising since 2009 and the level of overvaluation is clearly evident with estimates compared to historical averages of up to 25/30%.

Despite some chiaroscuro (see curve of yields negatively inclined or Treasury spread that discounts a recession from July 2020 onwards) unemployment is at the minimum levels of the last 50 years, GDP above 2% and inflation under control. Wall Street companies continue to grind profits.

For this reason, for the moment, until August 2020 the traffic light remains green and the best place to invest money is to buy shares.

Feds and rates

A nice hand to the markets came from the Fed that since August 1 has cut rates by 0.75%. This, according to Jerome Powell's words, "was done to avoid future slowdowns".

Precisely the threats are those projected by the redemption curve and by the Treasury spread.
The yield curve is not a perfect predictive tool (however such instruments do not exist!) And it did not work in all economies, but on Wall Street the last seven recessions were just anticipated by the negative inclination of the same.

However the statistic wants the recession to appear on the horizon after 12/18 months from when the negative inclination / flattening of the curve occurs.

So what if you're going towards a recession because stock markets are going up?

History has it that the S&P 500 12 months after the slope of the curve has always risen by an average between 7 and 15%. So, everything that happens continues to be in line with historical experiences.

Ergo, the best current investment strategy is to remain invested in stock markets.

Rate cuts to avoid recession

There is however another element in favor of the stock markets.

The Fed also cut rates in other historical situations to avoid a future slowdown / recession and this happened over the years:

1971,1984,1989,1995 and 1998. In all cases in the following 12 months the markets then rose to 16%.

So where should you invest?

History continues to say that the best places are still and equity markets will be at least until August 2020!


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