The world economy is booming. The IMF and the OECD have now increased their growth forecasts to 3.9% this year and next, and world trade is growing much faster than world GDP for the first time in six years. However, there will soon be a major correction in the equity markets. The main reason for this sounds relatively trivial: they have gone so well for so long and now they are correspondingly expensive.
In the US, the Fed will continue to raise interest rates after full employment is actually achieved and fiscal policy is making its way into the gas market. The fact that consumer prices and wages are only rising moderately does not disturb monetary policy, but is only a matter of time. The discount rate at which future profits and dividends are discounted has therefore increased, which in turn puts pressure on share prices.
Inflation prospects in the euro area are even more favourable than in the US: underemployment continues to prevail, core inflation, an important early indicator of consumer prices, has only been at 1% for five years and the strong euro is reducing foreign trade prices. Moreover, aggregate fiscal policy continues to focus on reducing budget deficits. The ECB must compensate for this restrictive effect. Although the bond purchase programme is likely to expire later this year, the main interest rates are not expected to increase soon afterwards. The economic situation is visibly improving, but is not yet good.
Overall, US equity markets are more vulnerable than European equity markets due to rising interest rates and very high valuations, but there is no doubt that a collapse in the US would result in a slowdown in European markets.
We are currently living in the best of the worlds: employment is growing rapidly, prices are stable, profits are still rising, currency and bond markets are calm. The expansionary monetary policy can be continued without any problems for a long period. Risks such as a further sharp rise in oil prices, tightening monetary policy measures in the US, the relatively high level of private sector debt in France and China and the escalation of the trade war should be manageable, but not the risk that one day a wave of profits will lead to a deepening of world stock markets. When this happens it is, as always, difficult to predict, but it is the „when“, not the „if“.
Translated with www.DeepL.com/Translator