Stock markets at highs: How to prevent the risk of altitude sickness without missing out on highs | Financial markets

Against the backdrop of echoes of US inflation data for January at 3.1% – worse than the market expected – both the S&P 500 and Nasdaq technology indices are hovering near their historical highs, at the border of 5000 points and 15900 points. respectively. In Europe, the EuroStoxx 50 Index and German and French indicators are at previously unseen levels, London is very close and the MSCI World Index is treading on virgin ground. To top it all off, the VIX volatility indicator is at 14, indicating that there is no fear in the market despite this…

Against the backdrop of echoes of US inflation data for January at 3.1% – worse than the market expected – both the S&P 500 and Nasdaq technology indices are hovering near their historical highs, at the border of 5000 points and 15900 points. respectively. In Europe, the EuroStoxx 50 Index and German and French indicators are at previously unseen levels, London is very close and the MSCI World Index is treading on virgin ground. To top it all off, the VIX volatility indicator is at 14, indicating a lack of fear in the market despite these milestones in the stock.

Investors are left wondering: Are these highs a good time to enter the stock market? Is it time to collect profits? Would you be interested in betting on bearish strategies in a declining price environment? The expected fall in interest rates, the progress of the economy (recession or soft landing) and the evolution of business profits will have to answer these questions to understand whether we are in expensive markets or ones that still offer the potential for greater profits. “The market has quickly built up expectations that inflation will fall, that we will avoid a recession and that the Federal Reserve will cut rates soon, and it only takes a few variables to disappoint a market correction to materialize, and the fact that this is an Election Year in the US adds some degree of uncertainty,” explain Mario Gonzalez and Alvaro Fernandez, Business Development Directors of the Capital Group at Iberia.

There are some elements specific to the stock market that may prolong this euphoria. Many managers decided to take refuge in the money market in 2023, convinced that a US recession was imminent, which never happened, and therefore are looking to correct the mistake they made. This abundant liquidity must emerge. Kevin Toze, a member of Carmignac’s investment committee, comments: “I wonder where these assets will go as yields on cash benchmarks become less attractive. Our thesis is that the stock will benefit,” he concludes. Additionally, Wall Street’s own gains in 2023 have been concentrated in the so-called “Magnificent Seven” tech companies, ignoring smaller-cap companies that could now continue to rise.

Andrew Paisley, small cap director at Abrdn, advises investors that in these large cap markets, “they should look further down the cap scale.” And Mark Sherlock, head of US equities at Federated Hermes Limited, points out that small- and mid-cap valuations “are much more reasonable and trade at a 30% discount to their larger-cap peers (they have historically traded at higher caps ). bonus 10%),” he explains. Michele Morganti, senior equity strategist at Generali AM, also recommends smaller stocks from Europe and the US for investors suffering from altitude sickness due to index performance.

Managers and analysts like to look to similar situations from the past to make their forecasts. Jaime Raga, head of client services at UBS AM, points out that the MSCI World index’s return of 15.8% for the three months ended last January was surpassed only by “the dot-com bubble, the end of bear markets caused by the recession and the successful rollout of vaccines, allowing life to begin to return to normal after the Covid-19 pandemic. And he adds: “We believe it is time to pause the historically strong gains in equities.”

The so-called VIX fear index is at very low levels: the investor is betting on growth

A contrasting view is offered by Duncan Lamont, head of strategic analysis at Schroders, in a study of US stock market peaks since 1926. “Of the 1,176 months since January 1926, the market reached all-time highs in 354 of them, 30% of the time. And on average, returns in the 12 months following the record high were better than at other times: 10.3% above inflation, compared with 8.6% when the market was not at its peak.” Explain. And he adds: “There may be good reasons not to pick stocks, but a market at all-time highs shouldn’t be one of them,” he concludes.

Looking further into the future, Virginia Perez, chief investment officer at Tressis, highlights the S&P 500’s 22% gain from last October’s lows, or 14% for the Stoxx600. “Now is the time to wait or be very selective. “Differences in behavior between stock exchanges, sectors and company sizes create long-term investment opportunities.” This expert is cautious about the market regarding a possible price collapse, given good economic data and price consolidation overall in early 2024, barring tech euphoria. “Instead of taking an aggressive bearish position, we prefer reasonable profits,” he concludes.

Choose a bag

The giddy feeling of stock highs can vary in degree depending on the market. Analysts agree that American stock markets are more expensive than European ones, but this does not make the choice any easier: opinions are divided. Manager Janus Henderson said they believe European stock markets “continue to offer attractive valuations relative to the US, presenting a unique opportunity for investors.” And Goldman Sachs analysts highlight that Europe’s valuation has risen to 13 times PER in recent months, “although it remains at a deep discount to the US,” and they expect an increase of around 9%. . over the horizon of one year.

While manager Edmond de Rothschild remains neutral on equity investments, his investment manager Benjamin Melman this month reiterated his commitment to the Old Continent: “Not only are investors too pessimistic about Europe, but European stocks will benefit from an unexpected global economic recovery and second, the strength of the US economy could pose a challenge for the Federal Reserve on when and how much to cut rates, but the ECB is free to act as the economy has stabilized,” he explains. Michele Morganti is stepping up his bet on EU stock markets, which are “cheaper than the US, but we remain neutral on US companies in the IT sector as they continue to be well supported by higher earnings dynamics,” he explains.

Europe is cheaper than the US, but analysts are divided on which option is the best

Bank of America expects a significant 20% correction in the Stoxx 600 index in the first half of the year based on “weakening economic data and renewed inflation concerns” before achieving a modest recovery before the end of the year. Mabrouk Chetouan and Nicholas Malagardis, strategists at Natixis Investment Managers Solutions, are euphoric about the United States due to “the high likelihood that the United States will land softly due to domestic demand resistance; the expectation that technology sector revenues will continue to grow; and finally, the belief that upcoming rate cuts will support economic growth.” They add: “We are in a different situation in Europe due to the fragility of the growth outlook, which is affecting earnings expectations, and the lack of clarity on the monetary and policy fronts.”

The fear of highs is not yet reflected in prices, and stock markets continue to brag about hitting new highs. But stock market corrections are almost never announced. Selecting and rotating stocks and stock markets can be a good strategy for what seems like a challenging year.

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