Stock market bulls on the American trading floor do not seem to let go and still keep control over the market. This could be proved by another all-time record, which was reached today on the Nasdaq 100 index.
At the beginning of the week, the mood seemed not to be the best. Investors were generally risk-averse. Stock indexes were falling and bonds were rising in price. Then the Nasdaq 100 index fell to the region of 14460 points, creating the biggest correction since May.
However, announcements of further expansionary monetary policy by the world's major central banks seemed to have boosted investors' faith in the stock market and companies' results. In the end, this could lead the Nasdaq 100 index to a record high exceeding 15 000 points.
It seems that the stock market indices may also be helped by the retreat on the bond market, where some funds may have flowed from one market to another. It is also worth mentioning that the yield of American 10-year bonds is 1.3%, while the expected price to earnings ratio for the Nasdaq 100 (forward P/E) according to the data published by the Wall Street Journal is 27.4. Converting the P/E ratio into the potential profitability of investments, in order to be able to compare the possible profitability of shares and bonds, we will come to the conclusion that the profitability of investments in companies representing the entire Nasdaq 100 index is 3.65%. (100/27,4). Thus, the value is 2.8 times higher than for a potential investment in bonds. Hence, investors in the world of low interest rates, low bond yields and relatively high inflation, i.e. negative real interest rates, may still look for investing capital in riskier assets, including stocks.
It should also be added that the probability of interest rate increases in the USA, calculated on the basis of Fed Funds Futures, has moved from the end of 2022 to the first quarter of 2023, which may also be good news for bulls, but first of all for companies that could finance their activity longer and cheaper. According to the latest data presented on the CME Group website and the FedWatch Tool, the probability of a rate hike in February 2023 is less than 59 percent.
The other major indexes in the US like the S&P 500 and Dow Jones are also at historic highs. It seems that they are not far from reaching their records. Perhaps, the Federal Reserve's decision scheduled for next Wednesday will help to beat them. The meeting will probably be the event of the week for the financial markets.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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