Market Comment - March

The last six months have provided excitement around the virtues of simply staying invested in the equity market at all times, as timing market moves makes no sense, given market whims and behavioral biases. The bullish run in major stock indices has been persistent in 2024, leading to glorious extrapolations of the past. Price targets for the S&P500 have been raised in the financial press, with some pundits claiming the index will reach 7,000 or even 10,000 points in the next couple of years. A financial podcast suggested that the German DAX will reach 40,000 points in the next five years. New price highs above the 2021 bull market peak have markedly swelled bullish sentiment. Analyst types are now rushing to make insanely bullish projections for equity indices. This bulge of optimism is a warning sign that caution is warranted.

At the same time, it is worth mentioning that, adjusted for inflation, most equity market indices have barely broken previous all-time highs. During the past six months, a resilient economy and abundant liquidity, as previously mentioned, from all kinds of sources, coupled with the hype surrounding artificial intelligence, have been the main drivers for rising stock prices. While some companies, especially Meta, continue to hail the AI future, we find it mostly delusional. Mark Zuckerberg, in an interview, explained how AI can fix everything, from incurable diseases to climate change. Currently, the CEO of Meta could provide only one example of how he uses AI: he uses it for his toaster. The USD 17 billion capex of Meta that went into Nvidia chip spending has not been deployed into the company’s operations. Some analysts claim that the energy infrastructure in the US is currently not sufficient to provide enough energy. One could come to the conclusion that we are seeing over investments in the tech sector and not enough spending on energy and infrastructure projects.

The market may have started to agree with the latest, as the technology sector started to underperform, while the materials and energy sectors began to outperform. Number crunchers suddenly realize that the infrastructure needed to implement AI will demand a stunning amount of copper. While the hype around ESG has waned, it is resilient, and commodity investments remain unloved. This could lead to a scarcity in some commodities as production cannot keep up with demand. US data centers are expected to grow by 50% until 2030. If so, we will witness an unprecedented rise in demand for electricity. Meanwhile, the global debt burden continues to grow, especially in the US, where the government continues to project an annual budget deficit of around 6.00%. If the US Central Bank is unable to cut rates substantially, it will lead to interest payments of USD 1,600 billion in 2024. The resilience of inflation will become a problem. “Higher for longer” will also mean that the commercial real estate market, as well as regional banks, could get hit again. The Bank Term Funding Program has ended, and the Repo Facility is almost empty.

While the global economy remains in good shape, the next couple of months could bring us the market volatility that the “buy and hold” crowd has avoided since October. According to our research, liquidity has been mostly drained from the system, which could lead to a bumpy road for equity markets in the next couple of weeks. The Presidential Election Year Cycle supports this. Nevertheless, there are no signs that the market sees a recession in the foreseeable future.