Monetary policy dominates the stock markets.
(Photo: AP)
On Friday it was that time again: Good news from the US labor market turned out to be bad news for stock prices.
It’s good for American workers that unemployment has fallen and is very low at around 3.5 percent. That’s bad news for the US Federal Reserve (Fed) because they can’t get inflation under control with a hot job market.
And markets fear that the Fed will actually do what it has promised time and time again: keep raising rates until inflation ensues.
Hopes that an about-face in monetary policy was within reach were dashed again. The US stock market reacted according to the usual pattern: Highly rated tech stocks were hit particularly hard by the bad news. Because when interest rates rise, the valuation ratios change.
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For a long time, the safe, short-term interest rate on government bonds in the USA was zero, and in Germany it was even below zero. This made it clear that only stocks could bring profit. There are now 4.3 percent for two-year paper in the USA and 1.9 percent in Germany. Against this background, equities are far less attractive – and prices are falling.
Recession changes the situation in Europe
The logic that good news is bad and bad news is good always prevails when monetary policy dominates the markets. And this year she is doing that to a particularly high degree. As a result, bonds and equities have suffered equally high losses, and the risk balance between the two asset classes does not work in today’s environment.
The European Central Bank (ECB) has far less influence over the markets than the Fed. And in Europe, the risk of a recession because of the energy crisis is far greater than in America. Therefore, a more “normal” logic could prevail here, according to which good news is good for the stock market and bad news is bad.
Because whether companies are still making profits in a recession would then come to the fore before interest rate arithmetic. Maybe we’ll end up with a situation where good news is bad for the US and bad news is bad for the stock market in Europe. That would be bad, because good news for the economy can be expected from the USA and bad news from Europe.
All of this will only become clearer when the central banks have managed to normalize the long-term soft monetary policy. Until then, it will be a tough road for investors.
More: The turnaround in monetary policy is not yet within reach