Grab it now?: Stocks yes – but not because of falling inflation

Strike now?
Stocks, yes – but not because of falling inflation

By Christina Lohner
December 1, 2023, 7:31 p.m

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The financial market is hoping for falling interest rates in view of the surprisingly large decline in inflation rates. Stocks appear more than ever to be a sensible investment. However, there are better times for this than now.

The most famous Wall Street index, the Dow Jones Industrial, reached its highest level in around two years the evening before, and the DAX surpassed the 16,300 point mark in the morning. The driver is the hope that interest rates will soon fall after inflation rates have fallen significantly. In Germany, price increases in November reached 3.2 percent, the lowest level in around two and a half years; in the euro zone, consumer prices only rose by 2.4 percent. The Italian benchmark index hit a 15-year high on Thursday, while the Spanish index rose to a five-year high. Are all signs now for investors to buy stocks?

“Falling inflation could lead to interest rate cuts, which is fundamentally good for stocks,” says Stefan Riße, capital market strategist at asset manager Acatis, in an interview with ntv.de. Robert Halver, who heads the capital market analysis at Baader Bank, put it this way to ntv.de: “Interest rates are the classic enemy of stocks – if they fall, that is positive for the stock markets.” The financial market is expecting the interest rate reduction phase to begin as early as the second quarter of 2024. Halver also expects three to four, if not more, interest rate cuts from spring onwards, both in the USA and in the euro area.

Riße, on the other hand, does not expect interest rate cuts in the first half of 2024. Because “for the first time in history, the economic downturn is not accompanied by heavy layoffs; on the contrary, there is a labor shortage in many areas.” The task of the central banks is price stability – to combat inflation, they keep interest rates high. According to Risse, their overarching goal is to combat unemployment. With a robust labor market, central bankers can wait to cut interest rates.

Makes more sense when inflation rises

Riße expects that the current economic weakness will continue to worsen; in his opinion, the numerous bankruptcies in the construction industry will also follow in other sectors. According to his forecast, interest rates will only fall in the second half of 2024.

“Is this a reason to buy shares now? No,” says the capital market strategist. Because during recessions the stock market also falls. Riße is reminiscent of the financial crisis that began in the summer of 2007. “Immediately afterwards we saw the first interest rate cuts, the last ones at the end of 2008 – and the stock market low was in March 2009. To think that everything will change with a first interest rate cut is wrong.” The market expert therefore does not expect that the stock market will be able to further strengthen its recent upward movement. In his eyes, the market only reflected that the interest rate peak had been reached. “I don’t see that it will now be carried forward by interest rate cuts.”

In the long term, investors should definitely invest in stocks, Riße makes clear. However, even more so when inflation rates rise than when price stability or falling inflation rates occur. “Because stocks are the best protection against inflation, as it has been shown.” Real estate, on the other hand, lost value due to the increased interest rates, as did interest-free gold. “It’s just that the stocks have done really well; we’re almost at record levels.” The reason: With inflation, companies’ sales and profits also rise nominally, at least with stable profit margins. “And that’s what we observed recently,” says the market expert. “Companies even made a killing with intermediate products – German producer prices rose by 45 percent in September 2022.”

Now it’s up to the ECB

Halver believes that the right time to buy shares has long since come. He expects the economy to stabilize as a result of interest rate cuts, which will stimulate the economy. The resulting higher corporate profits would benefit the stock market. In any case, his recommendation is to buy stocks regularly in the form of savings plans. At the industry level, he recommends two in particular: high-tech stocks from the USA, because their business models are intact and fantasies of interest rate cuts justify the high company valuations. According to Halver, investors in Europe should focus on cyclical, i.e. cyclical, stocks that will benefit from the gradual stabilization of the global economy in the coming year. “Since the values ​​are very cheap, you should invest in mechanical engineering, electrical engineering and chemistry, among other things.”

The European Central Bank (ECB) temporarily stopped its interest rate hikes in October after ten hikes in a row. The relevant deposit rate on the financial market, which financial institutions receive from the central bank for parking excess funds, is currently 4.00 percent. This is the highest level since the start of the monetary union in 1999. ECB President Christine Lagarde recently said that no change is expected in the next few quarters. The last interest rate meeting in the current year is on December 14th. Experts assume that the ECB will then maintain the interest rate. Bundesbank President Joachim Nagel said this week that it seemed to him “far too early to even think about a possible reduction in key interest rates.”

Deglobalization is likely to drive inflation

Capital market strategist Riße considers the interpretation that inflation rates have fallen due to the ECB’s monetary policy to be “nonsense”. Instead, the reason for the decline in inflation is the base effects: Last year, prices rose so drastically as a result of the Ukraine war that they are no longer rising much in comparison. Inflation rates reflect price increases compared to the same period last year. Compared to the previous year, producer and import prices are actually falling, which is dampening the increase in consumer prices.

For the future, Riße expects higher inflation rates than in previous decades. For three reasons: because of the restructuring of the economy towards climate neutrality, demographics and because of deglobalization, i.e. the repatriation of parts of production from low-wage countries as a geopolitical strategy. Over the past 30 years, cheap labor in China has ensured stable prices in Germany. “Mass products have even become cheaper,” says Riße. “A television today costs, relative to income, about a fifth of what it cost 40 years ago.” Above all, this globalization effect is now no longer present, as the working population in China is shrinking and wages there are now – in contrast to before – rising faster than productivity. “So we will have to see how inflation develops in a year.”