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Why are stock markets so high?

In France, as in the United States, stock markets are reaching unprecedented levels. This is mainly due to the increase in international investment, which is growing with the monetary policies of the central banks, and the positive sentiment of the economy related to the economic growth.

The health of stock markets around the world

Stock markets around the world are not aware of the problem. In fact, many of them have seen the price of their index, measuring the performance of the market, rising significantly since April 2020. The Paris Stock Exchange, as well as the New York Stock Exchange (NYSE) and Nasdaq , the American stock market focused on technology, reached on a scale never before recorded in history.

Historical CAC 40

The flagship index of the Paris Stock Exchange, the CAC 40 index reached an all-time high on Thursday, November 3, 2021.. It actually closed at 6,950.65 points, a level not reached since the creation of the index in December 1987. The previous record began on September 4, 2000 when the CAC 40 closed at 6,922.33 points.

The CAC 40 is up nearly 25% since the start of 2021., very successful. The rise of the CAC 40 is 85% when we compare its value on November 3 and on March 18, 2020, the lowest point reached after the spread of the Covid-19 pandemic.

CAC 40 GR is also very high

Changes in the CAC 40 only provide, however, a limited reflection of the performance of the Paris Stock Exchange. On the contrary, The performance of the stock market is not only measured from the level of stock prices, but also from the amount of profits received.. However, the latter is not taken into account when calculating the CAC 40.

In order to measure the performance of the market, it may be necessary to use the “dividends reinvested” indicator, which is calculated as if all dividends are systematically reinvested in the market for the same stock. An unlikely proposition, yes, but no less so than one that ignores stock returns.

The index consisting of shares returned to the Paris Stock Exchange is the CAC 40 GR (of great return). It is also reaching history today. Closing on November 3, The CAC 40 GR totaled 19,754.55 points, an increase of 21.6% since the end of 2019 and 93.3% since March 18, 2020.the lowest point recorded when the Covid-19 crisis began.

Changes in the CAC 40 GR index

Strong growth in international markets since the end of 2019

The Paris Stock Exchange is not the only one that has reached a high level. This is also the case for the New York Stock Exchange and Nasdaq. In other words, Many stocks around the world have been doing well for months and are now higher than before the Covid-19 pandemic..

Construction rules and calculations are related to different market indicators, which makes it difficult to compare trends. So, for example, the Dax also includes shares that have been repaid, and should be closer to the CAC 40 GR than the CAC 40.

But regardless of the calculation method chosen, each index remains very useful for studying the performance of a particular market. Whether it is the indices of the Nasdaq, Frankfurt, New York, Paris or Tokyo stock exchanges, we see that they have experienced increases, sometimes strong, since their prime.. In particular, while the CAC 40 has increased by 16.3% since December 31, 2019, the Dax, Nikkei 250 and Dow Jones have increased by 20% during the same period, with changes of +20.5%, +24.8 and +26.7%. The positive progress can be attributed to the Nasdaq, which has seen the value of the benchmark index increase by 84% since the end of 2019!

Global market comparison

How can you explain the rise in the stock market indices?

Explaining the short-term dynamics of market movements is a very difficult task. The volatility of the stock market, in fact, cannot be determined in the short term. At the moment, we can define two main types of explanations for the steady rise of the main stock market since the end of October 2020: the monetary policies controlled by central banks, on the one hand. , and the improvement of the macroeconomic outlook, on the other hand.

Ultra-accommodative financial policies

Equity markets are benefiting, first of all, from the results of the monetary policies implemented by the central banks from March 2020.. Taking the form of securities buying programs – known as quantitative easing or quantity reduction (QE), wants to deal with the economic impact of the Covid-19 pandemic. These financial policies, in keeping interest rates low and investing more within the financial system, raising prices in general and stock prices in particular. In particular, banks and financial institutions that the central bank buys securities from can allocate these funds to sell other assets, such as stocks, which raise their prices. Indeed, with equal supply, demand increases, which raises prices. In addition, the demand for all investors is increasing because only equities (along with real estate) offer the prospect of a return.

For the “normalization” of the actions of central banks

With the recovery of the economy and the return of inflation, the “stabilization” of monetary policy is imminent. This method is known, first, by a decrease in securities purchases provided by temporary programs, then by a reduce the size of the central bankat least a possible higher interest rates.

The Federal Reserve, the main bank of America, thus announced on Wednesday 3 November that it will reduce its monthly purchases and will gradually withdraw from the markets. The European Central Bank’s (ECB) short-term interest rate buying program is due to officially end in March 2022. However, the ECB considered that an interest rate hike in 2022 was “unlikely”.

The consequences of the stabilization of these systems by central banks on the stock markets are still unknown and will depend mainly on the timing of their implementation.

Good macroeconomic outlook

The second explanation for the positive movement of the stock market around the world lies in the positive outlook of the economy related to economic growth. In this context, many companies are recording or expecting an increase in their profits, which is raising the market prices of these companies.. The CAC 40 benefits, for example, from the success of companies in the financial sector, such as LVMH and Hermès, whose prices have risen by 34% and 59% respectively since the beginning of 2021.

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