Stock markets, which began the year experiencing turbulent growth, continued with a calmer mood in March. After Jerome Powell, Chair of the Federal Reserve, announced at the end of last year that the raising of interest rates should not be expected anytime soon and monetary policy may soon even be relaxed, stock prices have risen quickly on all of the largest markets and returned to last autumn’s levels. At the same time, future profit growth expectations of companies have become more moderate.
There are fewer illusions that the US Federal Reserve is independent when it comes to formulating monetary policy. Last year, when the Federal Reserve raised interest rates, President Trump made no effort to hide his irritation and signalled publicly that he was exploring the possibility of removing the headstrong Jerome Powell. Today, he has essentially grabbed the reins of monetary policy and begun to give signs that he is expecting interest rates to fall and looking for a general relaxation in monetary policy. To get his way, Trump appointed suitable people to the Federal Reserve Board.
Since the election, President Trump has measured his success by the rise in stock prices. The current economic cycle is one of the longest in the history of the United States, and if the economy should enter a downturn for the 2020 elections, Donald J. Trump’s chances for reelection will also diminish.
The stock market is a simple gauge. Theoretically, stock prices should reflect the long-term prospects for the economy; however, in the short term, they remain under the influence of monetary policy. Lower interest rates could also support the economy, although that association is not as strong in the short term as the connection between monetary policy and share price.
A more relaxed monetary policy would help Trump to preserve the strong pulse of the economy, created last year by the increase in public sector expenditures and the lowering of taxes. In current prices, US gross domestic product last year was 5.2% which, in and of itself, is an envy generating number for many countries. However, if one were to add that the US national debt grew by 7.23% at the same time, it puts things in a different light. The increase in debt does not make it difficult to purchase economic growth or be pleasing to the stock markets with the printing of money. At least in the short term.
Even though it appears from a distance that stock markets are offering excellent opportunities in the short term, upon closer examination it becomes clear that the risks are not at all small. This is why the investment team at LHV has, for some time, been directing its investments into projects and companies where we can see that future cash flows, and therefore the value of the project or company, can be better forecast than the predicting of changes in stock prices. I believe that the Baltic real estate market and unlisted companies, both local as well as international, offer a better risk-reward relationship when compared to stocks. The success of those investments also depends on changes to the interest environment, although prices are lower in the midst of so-called hot money.
Stock markets, which began the year experiencing turbulent growth, continued with a calmer mood in March. After Jerome Powell, Chair of the Federal Reserve, announced at the end of last year that the raising of interest rates should not be expected anytime soon and monetary policy may soon even be relaxed, stock prices have risen quickly on all of the largest markets and returned to last autumn’s levels. At the same time, future profit growth expectations of companies have become more moderate.
