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The reasons behind the stock market’s continued rise

Jan 26, 2023

Redacción Mapfre

This week, the markets moved in an almost sideways motion, given the importance of macro data released on both sides of the Atlantic, such as the German IFO business climate index and the Eurozone Purchasing Managers Index (PMI), as well as US GDP numbers. We now have confirmation on the improvement in the European scenario and, according to Alberto Matellán, chief economist at MAPFRE Inversión, “there are no reasons to think that anything will happen in the short term for this to change, so the positive market sentiment should hold firm.” Today we get the number for GDP in Spain, which MAPFRE Economics expects to reach 1% in 2023, as per the latest Panorama report published by the research service.

Matellán does however urge caution on the ups and downs of these figures, noting that “you have to look closely at how inflation evolves, because this improvement in the general scenario could lead us once more to inflationary growth, which would force the European Central Bank (ECB) to raise rates even higher.” Currently, the market has priced in a rate ceiling of 3.5%.

As such, prudence must rule the day. Ismael García Puente, fund manager and selector at MAPFRE Gestión Patrimonial, agrees that a soft landing is being factored in, due to the resilience of the labor markets, the reopening of China and lower energy costs. But he recalls anecdotally that the last time the ECB raised rates more than the Fed was in 2011, and before that, the previous time was in 2007 and 2008. “And we all know what happened then. Obviously, that’s not going to happen now, but favorable situations for the market don’t usually occur, so prudence should be maintained.”

All of this has led to a stronger euro, which has appreciated 14% against the dollar since September. And as Matellán points out, on top of the economic improvement, the aggressive tone of the Fed has become notably calmer across all the regions of the Eurozone, including Germany. In his opinion, these movements go hand in hand with a certain inertia that looks set to drive the community currency higher.

Records, risks, and reasons for caution (and optimism) in the markets

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How to invest with the stock market at maximums?

We are facing a high price scenario, in which questions for investors arise: Should one enter a market that is already “expensive,” or wait? Should you hold your investments, or is it time to sell? MAPFRE experts explain that being in a moment when stock markets are at record highs should not deter investment if we have a long-term outlook—the most suitable for retail investors—and good diversification.

Fed Highlights “High Prices” in Equities: Are We Facing a Bubble?

The U.S. Federal Reserve has dominated much of the economic and financial discussion in recent weeks, largely due to the debate over possible rate cuts, which were confirmed last week. On Tuesday, Chair Jerome Powell again drew attention by referring in a speech to the “fairly high” prices in U.S. equities. With Wall Street at historic highs, the question arises whether we are dealing with an equity bubble.