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The financial markets seem to grow again

On the other hand, looking at the direction of the market over the past few weeks, one can see that the decline is slowing down or even stopping, hence raising the question of whether now is the right time to start buying cheaper financial assets. An even more important question is what exactly to buy. There is no single, specific answer to both questions, but there are market factors that, taking into account, you can try to conclude what to do.

The end of monetary denials?

It is absolutely clear that the main market driver right now, both here in Europe and in other global markets, will be central bank monetary policy. When looking at this issue, more emphasis should probably be placed on the US Federal Reserve System (FRS), rather than, say, the European Central Bank. All world markets are currently highly dependent on Wall Street trends, and this is directly influenced by the actions of the FRS. European events would only concern US investors if something truly significant, let alone shocking, happened. Another reaction could follow if the market has been “ripe” for a long time to go up or down and some factor is needed to trigger this process. In a word, events in the US stock market mostly “displace” other world markets, while Wall Street itself is basically driven by domestic events. On the other hand, FRS shares are largely determined by inflation in the US, as well as local labor market developments.

As for the latter, it is in excellent shape, with the US unemployment rate rising 0.2 percentage points to 3.7% in October versus September. Despite the increase, this unemployment rate is very low and, if it remains at this level, it will not affect the course of the US currency, either towards an increase or decrease in interest rates. However, inflation in the world’s largest economy has been on a downward trend since the summer. In October, compared to the tenth month of the previous year, annual inflation in the USA was 7.7%, compared to September it recorded a sharp drop of half a percentage point. The decline has already been underway for four consecutive months, and from a relatively high point, as the US consumer price index rose up to 9.1% in the summer. This, in turn, could be an indication that if complications arise in the economy, the US may switch from previously raising interest rates to lowering them.

Reason to hope for a raise

If the central bank cuts interest rates, it also means a drop in lending rates, which in turn has a positive effect on investment and allows the economy to grow faster, but a faster growing economy also means more opportunities for listed companies, as well as enabling various funds to earn better income, including those that manage pensions. The world is like interconnected ships: inflation in the US is unlikely to decrease significantly, but the opposite will happen in Europe. Among other things, this indicates that the ECB will also become monetarily more supportive of currency area investors very soon. At the moment, the main question in future investment planning is: will news on the global economic downturn be more important than news on declining inflation in the investment decisions of stock exchanges? The last decade has amply demonstrated that news of an economic slowdown is no obstacle to higher stock prices. If the economic development news is negative, it may mean that the central bank will re-launch some economic stimulus measures, the end result of which will be a decline in lending rates, which in turn means that the yield on debt securities will also fall and their prices will rise. On the other hand, if the yield on debt securities declines, investors should seek profit opportunities in the riskier segments of the financial market, and money traditionally flows into equity markets at this time. A change in monetary policy would also be good news for Latvian pension funds, as it would allow them to recover the losses accumulated over the past year.

Stocks or bonds?

A drop in inflation and a change in the money rate will result in an increase in the price of both stocks and bonds. However, in the bond market, this increase is relatively small and will depend mainly on whether and by how much central bank interest rates decrease. On the other hand, the growth of the stock market is not limited, and the range of news affecting growth is also wider. Therefore, if you were to answer the question of which market to subordinate your long-term investments, whether you invest in insurance plans or cumulative pension funds or your investments in the securities market, then the answer would be more favorable to the stock market. . Market statistics also show that a positive movement may have started in this segment. Over the past two months, the broad market index of Wall Street “Standard & Poor’s 500” has increased by about 8-9%, although compared to the end of last year, the value of this index has decreased by 16-17 %. Meanwhile, the value of the German stock exchange index DAX has risen by as much as 18% in two months. However, from the end of last year to November 28 this year, the value of this stock index has decreased by 9%.

Even if the negative aspects of the global economy are far from over, it is possible that the stock market is back on the road to recovery, and this could indicate the possibility of positive developments in economic development as well. If the above scenarios play out, it could be bad news for those who hold gold-related assets in their financial portfolios, which are likely to continue to decline in value.

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