The start of the year on the stock markets is marked by an environment of high volatility and widespread falls. It represents the biggest crash after the covid crisis and the movement is being of special intensity in the United States indices. The S&P 500 has entered a technical correction zone, with an accumulated drop from recent highs of more than 10%. The Nasdaq, for its part, given the special intensity of the transfer of technology stocks, has even approached the start of a bear market with falls close to 20% from those highs. For their part, at least for now, the European stock markets are showing greater relative strength in the recent movement.
What has led to this correction? Mainly three factors. Firstly, the announced withdrawal of unconventional monetary stimuli, which the Federal Reserve had reissued in March 2020 after the health alert, caused a sharp rise in public debt interest rates in recent weeks. In addition, the current environment of high inflation has raised investors’ fears that central banks will have to speed up this withdrawal of stimuli, with the possibility that the tightening of monetary policy will be excessive and will ultimately impact the economic cycle. Secondly, geopolitical tensions, and in particular a possible intervention in Ukraine by Russia, is an added factor generating short-term volatility. Lastly, the high starting levels of share valuations, mainly in the United States, as well as the start of the results presentation season, are still potential generators of additional noise in prices.
That said, in the past, periods of normalization of monetary policy, in high growth environments such as the current one, have generally been favorable for equities. In the short term, volatility is expected to remain at somewhat high levels. This is determined, on the one hand, by the doubts generated by the monetary policy normalization process itself, although this week the Federal Reserve has suggested that it currently sees no reason to speed up this normalization. On the other hand, due to the uncertainty about the outcome of the geopolitical tensions in Europe. On the other side of the scale, the adjustment in the stock markets has been very substantial. It has meant a not insignificant “cleansing” of the valuation levels at the end of last year, very uniquely of the sectors that, like technology, had climbed the most. Barring major contingencies, and in the anticipated context of global economic expansion over the next two years, it is probably worth taking positions in both the US and Europe.
Rui da Mota Guedes and Daniel Manzano they are analyst and partner of Afi, respectively.
He knows in depth all the sides of the coin.
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