The year 2023 surprised us with a remarkable surge in the markets, but now, at the beginning of 2024, we find ourselves amidst a calmer sentiment. The question is whether this is just a temporary correction or a sign of something more significant. To answer this question, we need to delve into recent events, economic fundamentals, and the broader market outlook.
The Middle East remains a source of some concern. At first glance, the attacks on ships in the Red Sea and the assassination of the Hamas leader might seem like cause for worry. However, it is important to avoid attributing these events as the primary drivers of the current market situation. While freight rates in the Red Sea have indeed increased, they do not approach the scale of the supply disruptions experienced in 2020-2021, which were primarily attributed to labor shortages and COVID-19-related restrictions.
The real question is whether the Middle East situation poses a genuine threat to the markets. While the killing of the Hamas leader suggests that the conflict may linger, it is unclear if it will escalate to a level that significantly impacts the markets. The geopolitical landscape is certainly becoming more volatile, but for now, it seems to be playing a secondary role in market declines.
Turning to the macroeconomic picture, the situation is neither ideal nor dire. Recent labor market data offers some encouragement, although there have been downward revisions to previous months’ figures. Overall, there is no substantial deterioration in the labor market, which is typically a precursor to a recession.
Similarly, data on business activity presents a mixed bag of positive and negative surprises. However, the overall picture remains relatively stable, which is a positive factor for the markets. While there is no clear sign of an economic revival, there is also no sign of a significant deterioration.
The Eurozone initially presented a promising outlook, but unfortunately, published data on German retail sales indicates a decline. Europe appears to be vulnerable to both the risk of a short-term recession and longer-term challenges, such as the exhaustion of its growth model and a lack of competitiveness.
In the current climate, the key question is whether interest rate cuts can be sustained in the absence of an economic slowdown. Closely monitoring inflation data is crucial, as it can influence central bank decisions. While there are certainly risks associated with high inflation, for now, there seem to be several factors favoring disinflation.
Regarding the market situation, we seem to be experiencing a correction rather than a full-blown bear market. Despite a 3% decline, stocks remain relatively expensive. While there is still a strong presence of optimists in the market, it is important to remember that we have witnessed a tightening cycle, which could have a bearing on the market’s trajectory in the future.
In conclusion, the current market conditions suggest that we are dealing with a minor correction rather than a more serious underlying issue. However, it is essential to remain vigilant and closely monitor the situation, as the risk of larger difficulties cannot be entirely ruled out. For long-term investors, diversifying portfolios into other markets, such as the U.S. or Asia, may be worth considering due to the uncertainty surrounding Europe.
