Monetary policy works with lags thought to be 6 to 9 months. Hence, the current credit conditions (expected to remain in place until after the Summer), are likely to continue to have an impact on the US economy well into 2025. Nonetheless, US markets couldn’t care less.
Driven by the enthusiasm about AI and the new investor darling Nvidia – which is now the world’s largest company by market cap – they have gone on to new highs, barely taking notice of the Fed’s pronouncements, and finishing the month very positive. By the end of May, US stocks represented a full 70,9% of the MSCI World index. Given their outperformance this month, their share is likely to grow further.
Elsewhere, and particularly in Emerging world, investors do pay attention to US rates. With good reason: Higher interest rates weigh on investor confidence because Emerging markets need credit to fuel their development.
Specifically, cheap credit is one of the best drivers of growth. US yields are the main point of reference for debt markets. For many investors, the decision on whether to invest in EM debt hangs on interest rate differentials vis-a-vis US debt. If the differential is thought to be high enough to compensate the higher risk taken, they’ll invest. If not, they won’t. Hence, every time markets start betting on lower US interest rates, EMs celebrate. But on the other hand, when interest rates look likely to say high for longer, they suffer. So, on the whole, EMs have had a difficult month, especially in the Americas.
As for european markets they have also taken a tumble down. The European election and more importantly the elections in France brought to the fore the unpopularity of European leaders.
In the case of France, it also brought about doubts over whether or not the Eurozone’s 2nd largest economy will at least pretend to follow EU rules on public expenditure. Currently, France’s debt is offering yields that are similar to those of Portugal and the country’s deficits are likely to stay well above 3% of GDP until 2027 at least.
All in all, to mitigate volatility and leverage your returns keep your portfolio well diversified and privilege a strategy for the long run.