Typically, stock markets often show a cyclical turning point when they decide that Central Banks are going to start cutting interest rates, or perhaps, going to stop raising them. Stock markets turn up before the economy turns up, and they turn down before the economy turns down.
Central bank discount rates (such as the Fed Funds rate, the Bank of England base rate, or the Reserve Bank of Australia cash rate) tend to lag behind the cycle. The chart below shows the year-on-year change in GDP-weighted world average central bank rate, calculated for countries representing 83% of world GDP, compared with the GDP-weighted average PMI of the "Big 8" economies. Observe how the average Central Bank discount rate goes on rising for a year after the PMI peaks. So we might expect the world discount rate to start to peak about now, a year after the Big 8/world PMI peaked (June last year). The problem is, the US only started raising the Fed Funds rate 3 months ago, and is nowhere near through a typical rate rise cycle. And the European Central Bank hasn't even *started* raising its discount rate yet. On top of which, inflation is at 40 years records, and so far, still rising.
So the risk is that the world discount rate will keep on rising.
In addition, the huge jump in commodity prices is setting up the world for a deep recession ― perhaps as deep as the one after the 1972 commodity price boom. Probably as deep as the GFC (global financial crisis) in 2008. In that crisis, even though discount rates were plummeting, the stock market didn't bottom until March 2009, when it started to appear plausible that economies would recover. If we look at the 1974 and 2008 bear markets, which were associated with deep recessions, the share market continued to fall even though interest rates were being cut. That could happen again.
Interesting times.
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