In the second half of last week, Wall Street saw significant drops in the main indices. Investors were surprised by the conclusion in the minutes of the last Fed meeting that interest rate hikes in the US may be necessary before reaching maximum employment in the economy. Piotr Kuczyński, in his commentary for iWealth, reminds that the “dot” chart of views of Fed members shows that rate hikes will start already in this half-year, and rates will increase by 75 basis points throughout the year.
The past year was extremely successful for many stock exchanges and shares. On Wall Street, the S & P500 index gained 27%, the German DAX rose by 16% and our WIG20 increased by 14%. (after three years of inheritance). Polish smaller companies did much better – the mWIG40 improved by 33 percent, and the sWIG80 gained 25 percent.
The Warsaw Stock Exchange is still in the basket of emerging markets, and its collective index performed poorly in 2021 and lost several percent. He was mainly harmed by the strengthening of the dollar. The conclusion was that the WSE was not so weak, especially when compared to other emerging markets.
Stocks in the US and many other stock exchanges are highly overvalued. The price to earnings (P / E) ratio for the last 12 months for the S & P500 index is around 29, while a result around 17. The Robert Shiller index, i.e. C / E adjusted for inflation, is rapidly approaching the pre-crash level in the year 2000. For comparison, in Poland, the WIG20 has a P / E of around 12, which means it is very cheap.
Forecasts of a market collapse and a US crash are multiplying. One of the warnings is the amount of credit taken to buy shares. It reached a level where large corrections began in 2000 and 2008. In a comment for iWealth, Piotr Kuczyński believes that the risk of investing in stocks on Wall Street is very high and there may be a desire to take profits at any time. Then, a 20% drop in indices is likely, and such a regression is considered to be the beginning of a bear market, i.e. a bear market.
Piotr Kuczyński emphasizes, however, that it is not easy to predict when a breakdown will start. For there are many new individual investors who believe that “trees are rising to heaven” and that indexes will go up forever. These are their experiences. Interestingly, some serious mutual funds behave the same way.
– I often repeat that there is no analyst who would be able to predict how high the bull market will be driven up by human greed, or how deep the bear market can be caused by human fear – comments Piotr Kuczyński. He adds that declines may occur when investors are scared to death. It could be massive inflation forcing central banks to act, an extremely dangerous variant of the coronavirus, or some other so-called “black swan”, an event completely unexpected but drastically changing moods.
In general, Piotr Kuczyński expects a large correction on the stock exchanges in 2022, after which the stock market will continue to increase. However, not necessarily so big that the whole year would end in a positive territory.
The turn of December and January is successful for the Warsaw stock indices. You can talk about the spectacular rally of Saint Nicholas. Yesterday, the WIG20 went up by more than 2 percent, the WIG gained almost 2 percent, and the WSE was second to none in Europe. Tuesday’s increases are probably the result of the government’s presentation of the inflation target of 2.0. Investors assume that the reduction in VAT on fuel and food products will translate into an increase in demand.
The day before, on Monday, January 10, the WIG20 fell below the mark at the end of trading, which was caused by the exceptionally weak opening of the session in New York. If the WIG20 remained positive the day before yesterday, we would have had a record after yesterday’s trading – 12 consecutive sessions ended with an increase. This would be the best result for 28 years, as the previous series of 11 upward sessions in a row ended on March 1, 1994 (then the WSE was quoted only three times a week).
Analysts at Goldman Sachs and JPMorgan predict that this year may be much better for emerging markets than developed markets, because the popandemic development will primarily help the countries from the first basket. However, Piotr Kuczyński in his commentary for iWealth does not fully agree with this forecast. In his opinion, although WIG20 has a P / E of 12 and Polish macroeconomic data are very good, these favorable circumstances do not have to ensure growth for our stock indices. Many foreign funds bypass the WSE. They are guided by news and articles in Bloomberg, Reuters and the Wall Street Journal, which reassure them that things are not going well in Poland.
Piotr Kuczyński emphasizes that, in the opinion of foreign commentators, the Polish problem is not an economic one, because our economy is in a very good condition. The problem is political tensions, especially the disputes between the government in Warsaw and the institutions of the European Union. Moreover, there are far too many state-managed companies in WIG20, which the funds do not like.
This does not change the situation in which we may be hit by the so-called “junk wave”, when capitals are looking for markets that have not yet grown and invest some of their funds in them. And the WSE does not need huge capitals to bring about a boom. According to Piotr Kuczyński, the attitude to Polish actions may improve after possible early parliamentary elections. The problem is that if there is a bear market in the main world markets soon, a boom in Poland will not be possible due to the general decline in investor sentiment.