Before completing the first quarter of its life, the 21st century has already hosted some of the greatest crises in history. Crises that can only be compared to the Great Depression of 1929 and the “oil shock” of 1973-74. The bursting of the “dot com bubble” of 2000, followed by the Great Deleverage/Recession of 2007-2008, and then the pandemic of 2020 ushered in a multi-crisis era of supply chain problems, energy crises, invasions and wars. However, risky values like stocks have once again emerged as the winners in the investment world.
According to calculations by Alpha Bank, if someone invested 10,000 euros at the end of 2000 in shares, he would have today – based on the global stock index MSCI All countries – a total of 37,341 euros, compared to 19,845 euros if he invested it in bonds (based on the global bond index Bloomberg Barclays) and €13,856 (based on the 3-month cash index).
The international stock rally
If, in fact, almost 4 years ago, we were told that we would have a pandemic, Russia would invade Ukraine, wars in the Middle East would intensify, inflation would soar to 40-plus year highs, but the Fed’s benchmark interest rates would also be to 5.5% and the ECB to 4% from near 0% or even negative levels, while major international stock indices would crash twice, it would be hard to predict that the four-year average annualized return for the global equity index would be 9.3% against 7.7% of the long-term average.
The international rally in stocks even widened in the middle of the week, with markets on both sides of the Atlantic moving to historic highs, the Athens Stock Exchange with gains of 10% this year scoring one of the top 4 returns worldwide and the Japanese Nikkei index 225 to mark an all-time record, surpassing that set during the Japanese stock bubble 34 years ago, as the results of Nvidia, one of the protagonists of technical intelligence and responsible for a third of the gains of the Nasdaq 100 index this year, but also the ” most important stock on planet Earth,” according to Goldman Sachs, beat analysts’ expectations.
The technology industry
The stock in question, which has gained more than 40% this year and more than 400% since the beginning of 2023, is increasing interest in the technology sector and especially in the so-called “Magnificent 7” (Apple, Amazon, Alphabet, Microsoft, Meta, Tesla and Nvidia), which some analysts believe are approaching bubble levels. Their rise of 145% in the past 12 months is close to the 180% rise of the Dow Jones in the 1920s, the 150% of the so-called “Nifty 50” stocks of the 1970s as well as Japan’s 1980s , while still far from the 190% rise of the dot com bubble and the 230% of FAANG stocks (Facebook, Apple, Amazon, Netflix, Google) from the pandemic lows.
According to Bank of America, bubbles are often triggered by technological innovation, new geographic sources of growth and above all the easing of monetary policy by central banks which is just around the corner, with the result that sooner or later the stocks of “Magnificent Seven” responsible for 2/3 of the gains of the benchmark S&P 500 stock trend index in the last year, have to readjust their momentum.
The reduction of interest rates
The upward momentum that the stock markets have shown lately is due in addition to strong corporate profitability and the expectation that major Central Banks will start to cut interest rates. Market expectations based on bets on futures markets may not fully pan out, but the average estimate of economists at the world’s top “investment houses” is that rate cuts will begin in the second quarter of 2024. In particular, most they “see” the Fed starting tapering in May or June and the ECB after the March macroeconomic data for the Eurozone, i.e. in April or June, while on both sides of the Atlantic 3-4 rate cuts of 0 are expected, 25% this year.
In any case, volatile market assessments of interest rates are a major driver of volatility in the medium term, but what is important is economists’ belief that economies (barring unpredictable geopolitical parameters) will avoid recession and be led to a “soft landing”.
Stocks and bonds
Historical data from the last 50 years shows, however, that in cases where recession was avoided, stocks were the investment category that outperformed in the six months since interest rate cuts began, with gains of 17% at average levels, compared to 4.9% for corporate bonds. , 3.7% of government bonds and 3.1% of liquid assets. In cases where rate cuts were accompanied by a recession, 6 months after the first rate cut government bonds posted gains of 3.8% versus 3.5% for cash, 3.3% for corporate bonds and 1.1% for stocks .
Both when recessions occurred and when they were avoided, US Treasuries outperformed cash. On the eleven occasions since 1974 that the Fed has initiated interest rate cuts, the average six-month total return on government bonds has been higher than cash both in recessions and when the economy avoided recession. Bonds benefit from interest rate cuts because of the capital appreciation they will show, while money market products have interest rates adjusted lower during interest rate cuts. At the same time, highly leveraged corporate bonds showed a satisfactory total return six months after the start of the interest rate cut cycle in both recession and recession situations.
So in the soft landing scenario, investment-grade corporate bonds show better overall returns compared to government bonds, while equities appear to be the best investment option if interest rates fall and the economy avoids recession.
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