The Future of Stock Gains: Central Bank Rate Cuts and Seasonal Volatility

The Future of Stock Gains: Central Bank Rate Cuts and Seasonal Volatility

The latest stock gains are expected to hold strong until the end of the year, despite the possibility of a mid-year market correction. Economist Ludovic Subran, the chief economist at German financial services firm Allianz, believes that these gains will continue due to potential interest rate cuts from central banks. However, Subran argues that investors have overestimated the timing and magnitude of these rate cuts, which could lead to increased volatility in the markets. Despite this volatility, he predicts that the gains from late 2023 and early 2024 will still be present by the end of the year.

Central Bank Rate Cuts

Subran suggests that central banks may implement interest rate cuts later than investors have currently priced in. He argues that markets may need to adjust their expectations and re-price to align with a different rate cut trajectory. While investors anticipate a significant and early pivot, the economist believes that central banks will likely implement a mid-year rate pivot, albeit a smaller one than initially expected. This differing perspective on the timing of rate cuts may result in substantial volatility in the markets.

European stocks experienced significant growth in the final two months of 2023, leading to an annual gain of 12.7% for the regional Stoxx 600 index. Similarly, the U.S. S&P 500 has been consistently rising since late October and recently closed above 5,000 for the first time on record. These gains have been fueled by a solid earnings season, with companies reporting favorable financial results. Although some central bankers have expressed reservations about rate cuts, the overall sentiment remains positive.

Subran expects the future of stock gains to be influenced by seasonal volatility. While he anticipates the possibility of a correction, he believes that investors will realize that the pivot in interest rates will not be as drastic as previously assumed. This realization may be due to the resilience of economic growth in the U.S. and the stickiness of inflation in Europe. Despite the potential for short-term fluctuations, Subran predicts that by the end of the year, equity returns of 5-10% can still be expected.

The future of stock gains is dependent on central banks’ implementation of interest rate cuts and the resulting market volatility. Ludovic Subran, chief economist at Allianz, believes that investors have overestimated the timing and magnitude of rate cuts, leading to potential market re-pricing and increased volatility. However, he remains optimistic that the gains from late 2023 and early 2024 will persist until the end of the year. As investors adjust their expectations and navigate seasonal fluctuations, the equity market may still deliver favorable returns.

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