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Markets do not seem to fear recessions. Why?

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The world’s largest economies still struggle to get off the slippery slope of recession – in fact, the situation is worsening, with more countries joining the list of problematic ones.

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Germany, which has now had negative GDP for four consecutive quarters, has been joined by the UK and Japan, which have been in the same malaise for two months in a row.

In particular, the UK’s GDP contracted by 0.3% in the fourth quarter of 2023, and in the combined periods of the third and fourth quarters, the economy lost 0.5%.

Meanwhile, the Japanese GDP contracted by 0.9% in the last two quarters of 2023, pushing the country into recession for the first time in five years.

In addition, analysts fear that the Netherlands will follow Germany into recession, which could eventually have an impact on the economic situation in the EU and, consequently, on the EUR to USD currency pair rate.

Overall, the global economy is expected to face a significant economic slowdown in 2024, which, for some countries, could be a step towards a deep recession.

High interest rates, rising energy prices, increasing strikes, declining living standards, and the solvency of the population are some of the contributing factors.

Moreover, international trade is weakened by fragmentation and regional conflicts, such as escalating tensions in the Middle East, which aggravate and complicate logistics.

In addition, lending opportunities have diminished considerably due to inflation.

Yet the stock market does not seem to mind in the slightest. Japan and the UK are in recession, but both countries’ stock markets are thriving, and the former is breaking records.

Does this mean that a correction is imminent?

Well, it depends on the “smart money” decisions and general psychological factors.

For example, if these institutional investors conclude that circumstances could lead to a crisis and a wave of bankruptcies, they may shift their investments to more reliable assets.

Conversely, if there is a belief that the current downturn is temporary and economies, especially companies, have a bright future ahead, panic selling may not materialise yet.

Several indicators and factors need to be monitored to prepare for what lies ahead. First, it is crucial to monitor the technical indicators such as support and resistance levels.

Secondly, following the evolution of corporate earnings and general consumer demand provides valuable information. Finally, keeping an eye on multiples is essential.

Overall, it seems like we are approaching the final phase of the expansionary cycle. This suggests caution in allocating funds to risky assets as we navigate this potentially critical juncture.

 

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