Han Dieperink

Financial markets do relatively well when it comes to predicting the future. Collective wisdom is ultimately translated into share prices. Index investors benefit from this collective wisdom and are effectively free riders to the hard work of many. Yet in the stock market, it is not easy to distinguish between what is possible and what is real.

After Russia, the eurozone is probably the big loser in the Ukrainian war. Not so much politically or strategically, but economically. The eurozone economy was already ailing before the Russian invasion. That is why the buffers are not big.

Major investors like Warren Buffett and Goldman Sachs are increasing their positions in oil stocks. Buffett recently bought large positions in Chevron and Occidental Petroleum. For Goldman, Exxon is the favourite. The price of oil this year peaked at $123.70 a barrel on 8 March and has since fallen to around $100 a barrel. Historically, these are not low prices, but apparently there is more in the barrel.

The Nasdaq now trades more than 20 percent below last November’s high. With Big Tech remaining under downward pressure, other parts of the Nasdaq look promising. 

There has actually been a correction phase since February last year. First in the more speculative parts of the market, such as technology companies that are not making profits, SPACs or software companies with extremely high valuations.

For the moment, inflation is largely caused by a sharp increase in energy prices. Two years ago, the oil price was negative for a while, but since then it has been rising rapidly. Sustainability policy measures have contributed to this, because investment in new oil extraction has been under pressure in recent years not only because of the low oil price.

Not surprisingly, Berkshire Hathaway has risen 16 percent this year and has outperformed the S&P 500 by 23 percent over the past 12 months. Pricing power is an important criteria for Mr Buffett and Mr Munger in their selection process. Their company in essence is one large investment portfolio, and one that is resilient to increasing inflation.

After the stock market crash of 1987, measures were taken to prevent a new financial drama in the future. Under Ronald Reagan, “The President’s Working Group on Financial Markets”, now better known as the Plunge Protection Team, was formed in 1988.

The biggest risk for investors at the moment is high inflation. While the market places too much emphasis on short-term inflation, it also tends to underestimate long-term inflation.

The news that Powell might raise interest rates by 50 basis points next time was greeted with cheers, as it would bring inflation under control more quickly. However, the Fed will be able to live with inflation hovering between 3 and 4 per cent for a long time, although Powell will never admit that. In the eurozone, it is certainly not about fighting higher inflation.

Financial markets do not always react in the same way to news. There are times when the stock market seems immune to both bad news and good news. Investors keep calm and make investment decisions based on fundamentals. The market works. At such times, it is relatively easy for analysts. They analyse the fundamentals, the market reacts.

Expectations are growing that oil prices will rise further. The most recent rise was prompted by suggestions that the West would boycott Russian oil and gas, a boycott that materialised with US and UK decisions on Wednesday.