Stock market was right: Economy is resilient

The stock market is said to anticipate economic developments, although it is prone to excesses and over-interpretation. You sometimes hear the joke that the stock market has predicted nine of the last six recessions. The global bull market that started Autumn 2022 appears to have correctly anticipated the resilience of the global economy, with recent economic data pointing to a renewed acceleration in growth, including in Europe.

The recovery of the global economy and the opening of investment floodgates are key to the recovery of the cyclical Helsinki Stock Exchange.

According to the May S&P Global Purchasing Managers' Indices released last week, Europe's economic growth will accelerate in the second quarter after emerging from recession earlier this year (Q1 economic growth was 0.3% according to current data). Activity, orders and employment are moving in a positive direction, while the upward pressure on prices that has sabotaged the ECB's rate cuts appears to be easing. The PMI for the manufacturing sector "improved" to 47.4 points. Readings below 50 indicate a further decline in activity from the previous month, but 47.4 is still the best in 15 months.

 The European economy has shown resilience and adaptability despite high interest rates and the war in Ukraine.

Construction seems to be recovering, at least if you believe equity investors (why shouldn't we believe our peers?). Shares of Danish stone-wool insulation giant Rockwool have risen to near all-time highs. Although the insulation giant is also driven by energy efficiency improvements, not just construction, the stock can be seen as a kind of construction thermometer. The lion's share of the company's sales comes from Europe.

 

The joy is not limited to Europe: In the US, the S&P Global Purchasing Managers' Indexes also signaled a heated economy, but also price pressures. The Atlanta Fed's weekly updated near-real-time GDP growth forecast is 3.5% for the second quarter. The indicator can be seen as a good crystal ball for the average Joe, but the recent weaker 1.6% annual growth in the first quarter was a negative surprise for an indicator that had predicted stronger growth. 

The stronger-than-expected economy has also been reflected in interest rates.

The Fed is not expected to lower its key interest rate much this year, if at all. One might well ask whether interest rate hikes have had any effect on the economy at all, especially in the United States.

The ECB is on track to start cutting interest rates in June, but rate-sensitive Finns should not get their hopes up too much. The risk of disappointment is real. Expectations are for 2-3 cuts, but overall interest rate forecasts have risen this year.

Of course, higher policy and market rates are not all bad: they are a sign of a strong economy. In principle, the dream environment for the stock market is slow but not too hot economic growth combined with low inflation. Although the road to this scenario has been bumpy, the global economy has moved significantly closer to it over the past 18 months.

This is good news for investors who bought shares on the dips last fall and in 2022. There are still plenty of opportunities in the stock market, but the best places to buy seem to have been left behind for now. That is, until something in the market goes bust again.