Markets Update October 2024 - Upward trend on the stock markets continues despite risks

Global stock markets recorded impressive gains at the end of the year. Neither geopolitical tensions nor weak growth in China or the permanent slump in the German economy were able to slow down the bull market. Even the turbulence on the Japanese currency and stock market, triggered by the Japanese central bank's interest rate turnaround, was quickly overcome. As is so often the case, the stock market high was driven by the strong US markets. The US economy remained in a “Goldilocks” environment for almost the entire year: neither too strong for inflation risks nor so weak that fears of recession arose. This scenario, which is particularly appreciated on the stock market, increased risk appetite on Wall Street. In addition, all major central banks, with the exception of the Bank of Japan, eased their monetary policy, thus improving the global interest rate environment. Last but not least, the AI hype drove profit growth for many companies and at the same time fueled expectations of future profit increases in the coming years and decades. The latter is particularly important for market participants, as it is well known that the future is priced into the stock market.

High valuations call for caution

Despite the positive mood on the markets, risks should not be overlooked. Current share prices are significantly higher than corporate profits by historical standards and are also unusually high in relation to the bond markets. In addition, geopolitical risks remain difficult to calculate, particularly due to possible escalations in the Middle East and the growing tensions between nuclear-armed North Korea and South Korea.

Focus on US elections

The upcoming US presidential elections could cause short-term market fluctuations. Two scenarios are likely: a victory for Donald Trump with a narrow Republican majority in Congress or an election victory for Kamala Harris without a Democratic majority in Congress. Neither scenario would have a lasting negative impact on the markets. In the case of Trump, a deregulation and tax-cutting policy could follow, while Harris would be restricted due to a lack of support in Congress. In both cases, the US government deficit would remain high, which would mean higher US market interest rates in the future. A less likely risk scenario, in which Trump wins but does not have a majority in Congress, would lead to a protectionist trade policy and put a strain on export-dependent markets such as China and the EU in particular.