Stock Markets Are Ending The Year Cool, Calm, And Respected

Stock Markets Are Ending The Year Cool, Calm, And Respected
Paul Allison, CFA

2 months ago2 mins

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What’s going on here?

The stock market pulled off an underdog story that Hallmark movies could only envy, emerging as a hero after months of non-stop drama.

What does this mean?

Economists weren’t especially hopeful about 2023. They might’ve had aspirations of happy homes and exotic vacations, sure, but that was dampened by their predictions of recessions littering the world’s economies. After all, hampered supply chains were driving inflation higher, and central banks were fighting back with economy-bruising interest rate hikes. By most accounts, stocks should’ve ended up in the dumps. Yet, US and European indexes are closing out the year around all-time highs, while Japan’s stocks are at their highest in over four decades.

Japanese stocks
Source: Google Finance

Why should I care?

For markets: Money talks.

If your festive lunch turned serious, you likely heard pundits praise the end of interest rate hikes for bringing about stocks’ newfound sprightliness. With inflation finally headed toward central banks’ targets, they can start holding rates where they are – or even trimming them back down – to stabilize their economies. But that doesn’t quite explain it: interest rates are way above their ultra-low levels from a couple of years ago, and yet stocks are near their peaks despite there being no sign of a return to those lower rates of yesteryear. The difference, then, may be down to companies’ savvy cost management, with many prudent firms passing their higher costs onto customers to protect their bottom line, making their stocks look like decent bets even in trying times.

Interest rates
Source: Statista

Zooming in: It’s the most wonderful rally of the year.

Look at the world through a star-spangled lens, and it’s impossible to ignore artificial intelligence’s influence on the US market. The tech blew up in January when Microsoft bought 49% of ChatGPT-creator OpenAI for $10 billion, lending credibility to the theme previously most famous for dystopian movies. Investors then rushed toward any super-smart-tech-related stock to emulate the titan’s move, a flurry that meant the industry’s stocks were responsible for most of the S&P 500’s progress this year.

Big Tech valuations
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