“Beware of the market’s emotional load”

Volatility has returned to the stock markets, with dizzying rises but also significant declines. It is a situation that calls for caution, as stated by Alberto Matellán, Chief Economist at MAPFRE Inversión, in an interview with Radio Intereconomía’s “A Media Sesión.” “Beware of the market’s irrational and emotional load. It is swinging like a pendulum, and unless you have a solid understanding of behavioral finance, the best thing to do is cover yourself,” he explained. You need only consider that the company Nikola Motor—a manufacturer of trucks and vans powered by hydrogen and electric batteries—skyrocketed on the stock market by announcing a project that does not yet exist.

As the economist has been pointing out in previous weeks, there are three factors that justified the rises in the stock market: the macroeconomic data, which is better in the short-term; abundant liquidity; and the disappearance of certain risks. However, in the words of Matellán, these risks may come to light again, as is happening with the new outbreaks in Beijing, and also elsewhere around the world. “It is true that the economic data has improved, but there may be new infections. A sense of caution has returned and, for the moment, it looks set to stay, although the other factors that prompted the rise, such as liquidity, are still there,” he added.

In this regard, he values the realistic vision of the Chair of the Federal Reserve, Jerome Powell, who calls for caution despite what is being seen in the activity and employment data. And, as Matellán put it, “we have seen improved data, but the long-term scenario remains unknown, and not only to big business analysts, but to central bank advisors as well.”

Among the data, a boost in retail sales in the USA stood out this week, growing by almost 18 percent in May. But, as Matellán recalled, they are still below February’s levels, before the onset of the pandemic. Still, he believes that “US consumption will remain steady as the recovery begins, given that sales are improving as a result of fiscal support, accumulated savings…” Nevertheless, he warned that there is the precautionary savings element caused by the rise in unemployment.

Moreover, the eurozone’s CPI has also been released, which softened to 0.1 percent in May, the lowest level since 2016. This raises the risk of deflation that analysts fear so much. Matellán explained that “there is a consensus that the effect of the pandemic will bring it down further still, but in the long-term (from two years onward) there are balanced downward (unemployment) and upward (money supply) forces. These forces are growing, and when one overcomes the other the shift could be abrupt in either direction.”