Uncover the Potential of Stocks and Crypto in a Volatile Market
DOW: A Steady Climb
The DOW experienced a significant gain last week, reaching a new record high. This upward trend is a testament to the optimism surrounding the incoming Trump administration. With a 2% increase, the DOW continues to show strength and resilience in the face of market uncertainties. Investors are closely watching these developments as they seek to capitalize on the opportunities presented by a favorable regulatory environment.
However, it's important to note that market conditions can change rapidly. While the current momentum is positive, investors must remain vigilant and prepared for any potential downturns. By staying informed and diversified, investors can navigate the ups and downs of the market with greater confidence.
S&P 500: Reaching New Heights
The S&P 500 also saw a notable increase last week, approaching a new record high. This performance is a reflection of the overall strength of the US stock market and the confidence of investors. With a 2% gain, the S&P 500 is continuing its upward trajectory, driven by a combination of factors such as economic growth and corporate earnings.
Despite the recent gains, it's essential to remember that past performance is not indicative of future results. The stock market is inherently volatile, and investors must be prepared for fluctuations. By conducting thorough research and analysis, investors can make more informed decisions and manage their risks effectively.
Nasdaq: On the Cusp of a Record
The Nasdaq is making significant progress towards a new record high. With a 2% increase last week and only 2% away from reaching that milestone, the Nasdaq is showing strong momentum in the technology sector. Companies like Nvidia, which reported another stellar earnings report, have been driving this growth.
However, sector rotation is a common occurrence in the stock market, and it's important to monitor these shifts. As high-flying tech stocks face selling pressure at the end of the week, other sectors tied to the US consumer have performed well. This highlights the importance of diversification and a balanced portfolio to mitigate risks.
The Trump Administration's Impact
The incoming Trump administration is expected to bring significant changes to the regulatory environment for all companies. While this is generally seen as positive, there are mixed outlooks for many American multi-nationals. The need to sort through potential tariffs and their impact on businesses is a key consideration for investors.
Despite these uncertainties, there is optimism that the Trump administration will create a more favorable business climate. This could lead to increased corporate earnings and further market growth. However, investors must carefully assess the potential risks and rewards associated with these changes.
Crypto Currencies: Riding the Trump Train
The rally in digital currencies, especially bitcoin, has been remarkable since Election Day. Bitcoin gained another $6,000 to trade above $97,000, setting a new record. There is a general belief that Donald Trump, a crypto advocate, will eliminate regulatory headwinds facing the industry.
However, it's important to note that the crypto market is highly leveraged and prone to sharp corrections. While $100,000 could be a milestone number, it's possible that selling could ensue if the market becomes overheated. Investors in crypto currencies must exercise caution and understand the risks involved.
Gold: A Safe Haven
Gold had its best week in about two years, trading above $2,700 an ounce. In times of geopolitical turmoil and pricey assets, some investors are seeking diversification and safety in gold. The recent decision by Russia to lower the threshold for using nuclear weapons has added to the uncertainty in the global market, driving investors towards gold.
While gold can provide a hedge against market volatility, it's important to remember that it is not a guaranteed investment. The price of gold is influenced by a variety of factors, including economic conditions and geopolitical events. Investors should carefully consider their investment goals and risk tolerance before adding gold to their portfolio.
Stock Market Fundamentals
Using the S&P 500 as a benchmark, we can assess the current state of the stock market from a fundamental perspective. The S&P 500 PE ratio is currently 30.52, which is 1% higher than a week ago. This indicates that the market is trading at a premium based on earnings multiples.
While the market is showing strength, there is also a significant downside risk. Based on current earnings multiples, the downside risk is 47% from current levels. This highlights the importance of carefully managing risks and having a well-thought-out investment strategy.
If a short-term decline at these levels would not affect your day-to-day life, you may be well positioned. However, if you have short-term needs that could be impacted by market fluctuations, it may be advisable to seek professional assistance in crafting a plan that balances your short-term and long-term objectives.
Immediate Triggers and Structural Reasons
The immediate trigger for the ruble's decline was a wave of recent US sanctions. On November 21, about 50 Russian banks with connections to the global financial system, including Gazprombank which serviced international payments for key gas exports, were sanctioned. This led to a rush for dollars.However, there are also structural reasons behind the decline. The dollar has been strengthening against major currencies, and oil prices have been sliding since Donald Trump's victory in the US Presidential elections. This is seen by the markets as a promise of better US growth and increased oil production.Government Spending and Exchange Market Dynamics
Government spending increased in the fourth quarter, which is a normal occurrence. But this year, the numbers were higher than in previous years, creating an overhang of rubles on the exchange markets. This means there was a higher supply of rubles available.In October, the government allowed exporters to repatriate a quarter of their foreign exchange revenue. This led to an anticipated reduction in dollar supply.Impact of Sanctions on Transborder Operations
There was a constant rise in the cost of transborder operations due to the stiffening of sanctions against intermediaries, both trading and financial. This resulted in a rise in import prices and a decline in export revenue, tilting the exchange balance towards a weaker ruble.And finally, the sanctions themselves led to a rising demand for dollars in anticipation of even more shortages.Consequences for the Economy
The rate drop caused by these factors will lead to a rise in inflation, which is a concern for the Central Bank. Previously, a drop in the rate would attract foreign investment in cheaper rubles in anticipation of a higher rate and boost domestic production. But now, with the Russian market out of bounds for international capital, this is no longer possible.The overheated economy has no capacity to increase production, so the result will be a higher than pre-2022 rise in inflation relative to the decline of the ruble exchange rate. A 10% drop in the exchange rate can now be expected to cause about a 0.5 percentage point rise in inflation, compared to around 0.2 in better times.Options for the Bank of Russia
The Bank of Russia can't do much except reduce its purchase of foreign currency from the market as dictated by fiscal policy. It can't hike interest rates very far from the already painful 21%, which is causing the non-military elements of the economy to slow to stagnation and even flirt with bankruptcy.It also can't directly intervene in the forex market as it has a limited amount of dollars to defend the ruble. And it doesn't have the luxury of relying on China's supply of renminbi as China has shown no appetite for providing liquidity and swap lines to its ally.The Government's Solution
The most reliable option for the government is for President Putin to ask exporters to sell some of their foreign exchange revenue for rubles. This might help stop the decline, but it would transfer problems to the exporters as they are moving sales to rubles from dollars/euros to avoid sanctions risks and need the currency for their own operations.Alexander Kolyandr, a Non-resident Senior Fellow at the Center for European Policy Analysis (CEPA), specializes in the Russian economy and politics. He was born in Kharkiv, Ukraine, and lives in London.Europe's Edge is CEPA's online journal covering critical topics on the foreign policy docket across Europe and North America. All opinions are those of the author and do not necessarily represent the position or views of the institutions they represent or the Center for European Policy Analysis.Date: November 19, 2024Time: 10:00 a.m. – 6:00 p.m. CTRegister Now