The Global Capital Market – Where To?

In the weeks prior to Donald Trump’s election as President of the United States, most capital market experts predicted a decrease in American stocks in the event that Trump would be elected, and he was. The reason for this was that there was concern regarding Trump’s actions, which were difficult to predict, and it is well known that the capital market is not fond of surprises and changes.

After Trump’s election as President of the United States, the equity markets rose by at least 12-14%, whereas in the emerging markets, the increase was even more significant, close to 28%. It is important to note that in Israel, the stock market experienced a lesser increase in comparison to the international indices.

Can the capital markets truly predict the future?

According to financial theories, capital markets can predict the future, and in most cases, when looking back, most of the predictions are proven to be accurate. Capital markets predictedearas of global growth and international crises. This is the power of the ‘Vanishing Hand,’ a term coined by Adam Smith in the 18th century, and is still relevant today. However, at times ‘exceptions’ can be found to this statement – and the stock market manages to surprise, such as in the hi-tech bubble in 2000 and the great crisis of 2008.

Some claim that the increases over the past year create a bubble in the stock markets as well as in the equity markets in developed world and in the emerging markets. However, some claim that the gains of the company’s profits justify the increase and that the global market is not a bubble but in a state of growth. Data from recent months shows an increase in the growth of the American economy – from 2.2% to close to 3%. This phenomena is evident in other markets as well, Euro zone and in the emerging markets. This provides some peace of mind to those who fear the collapse of the capital market.

Some claim that the increases over the past year create a bubble in the stock markets as well as in the securities markets and in the emerging markets. However, some claim that the gains of the companies justify the increase and that the global market is not a bubble but in a state of growth. Data from recent months shows an increase in the growth of the American market – from 2.2% to close to 3%. This phenomena is evident in other markets as well, Germany for example, and in the emerging markets. This provides some peace of mind to those who fear the collapse of the capital market.

The political tensions are at their highest – and the capital market is unaffected

Surprisingly, the political tensions only increased over the past year – the relationship between the US and North Korea became extremely tense and threatens to get out of control; the tension between America and Russia has escalated; and, of course, there is constant tension within the Islamic world, between the Sunnis and the Shiites, which has become particularly prominent over the past few months. If Barak Obama was neutral, the current president has made his support for the Sunnis very clear.

Despite all tensions mentioned here and their evident increase in the year 2017, they had no impact on capital markets. This is in complete opposition to the common saying that political tensions are bad for capital markets. Is the growth in the markets justified, or are we close to the burst of this bubble?

A bit on Israel: The indices in Israel have raised at a low rate, the main reason for this is the Teva stock crisis and the vulnerability of Pharma stocks. Even if we neutralize the Teva crisis, the performance of the stock market in Israel did not exceed the global average. If we accept the assumption that capital markets predict the future, the Israel market is in no better shape than other markets around the world. It is worth noting that in the years following the 2008 crisis, Israel performed better than other markets and there was a sort of ‘euphoria’ that continues to this day. In Israel a certain narrowing of the gap is occurring between its performance and that of the rest of the world.

Conclusion

One of the main reasons for the increases in the markets are low interest rates around the world – which encourages many more to enter the stock markets. In response to this, the US has begun raising these especially low rates. In Europe, it is expected that the interest rates will remain low and it is likely, barring significant increases in European equity markets, that despite the predictions, this will decrease the chances of a crash.

So what will the markets look like over the next year? There is no doubt that there is an improvement in earning of the companies, but there are escalating political tensions, which cause a reasonable prediction to be difficult. Therefore, it is extremely difficult to predict the stock market of 2018.

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