Sure, the new year is already a few weeks old. But we still have most of 2024 ahead of us. That’s why it’s still worth taking a look at what could move the markets in the coming months.

Investors seem optimistic. Just a few days ago, the German stock index (DAX) surpassed the 17,000 point mark and is now at an all-time high. The US blue-chip index, the Dow Jones, is also only slightly below its historical peak. The same goes for its broader brother, the S&P 500.

Inflation – currently at least, it seems – is on the decline. The bond markets have already anticipated possible easing by the major central banks. Yields on longer-term bonds have been trending downward for some time. Gold recently experienced a small setback, while Bitcoin continues to rise, gaining over 20% in value this year already.

Professionals and private investors naturally wonder if the air is getting thin. And on one or the other trading platform, gamblers and speculators are preparing for potentially much higher volatility and positioning themselves to make money in the blink of an eye.

Inflation – actually still on the decline? In recent months, the inflation rate in the USA and the EU zone has noticeably fallen. In January, consumer prices in the United States rose „only“ 3.1%. In the eurozone, the rate of inflation was 2.8%, down from 2.9% in December. This decline – a positive news from the economy – is mainly due to the stabilization of energy prices. However, the so-called base effect must also be taken into account, as inflation rates exploded after the outbreak of the Ukraine war.

Can we finally put the issue of inflation to rest? I am by no means certain. Energy prices are still extremely volatile, which could either accelerate or dampen inflation, depending on the direction of prices for gas, electricity, and so on. So far, the winter has not been too harsh and cold. However, it is still some time until spring, and we have already had very cold days in April and May.

Therefore, I do not see a sustainable all-clear signal on the inflation front. In addition, the labor market in the USA remains relatively strong. If this continues, it could result in a renewed increase in consumer prices, at least in the USA.

The central banks‘ interest rate policy The major central banks such as the Fed in the USA and the ECB in the eurozone did what they had to do and will have to do in the future: they raised interest rates at a relatively high pace. These are now as high as they were before the outbreak of the global financial crisis in 2007.

Now, the central banks are at the ready to loosen the reins on interest rates. However, the ECB and the Fed have only hinted at it and not taken action yet. This is different from the market, which has already anticipated interest rate cuts by mid-year. This can be seen, for example, in Germany’s rapid decline in interest rates for overnight and short-term fixed deposits. In addition, yields on longer-term government bonds have been trending downward, as seen in the average rise in bond prices.

By the way, this is particularly exciting for homeowners in Germany. When mortgage interest rates peaked at over 4% for ten-year loans, they are now „only“ around 3%.

It could be that the market is right. But it could also be wrong. It may be risky to base your investment strategy solely or mostly on the central banks‘ interest rate policy. On the other hand, the still comparatively high uncertainties in the global bond markets are an ideal playing field for traders.

What are the stock markets doing? Last year and in the first weeks of the new year, the global stock markets seemed largely unaffected by everything that is happening in the world – as if the Ukraine war did not exist, as if the war in the Gaza Strip did not exist, as if the rise of the right in Europe and the USA did not exist, and as if there were many other things that weigh on people in their daily lives.

The DAX, Dow Jones, and others are trading at record high levels. Therefore, the idea that the air is getting thin is still absurd. Cautious investors are considering taking profits or hedging their positions with certificates, warrants, options, and/or futures.

Value stocks and small caps So-called value stocks, especially in Europe, still seem relatively cheap at the moment. This may surprise some investors and encourage them to buy immediately. But beware: The discounts seem plausible. Because those value stocks usually come from cyclical industries. And these are known to suffer from a weak economy. In particular, the economic engine in Europe is likely to stutter this year.

My conclusion from this is that value stocks are likely to remain a second choice for the time being and remain relatively cheap for the foreseeable future. In other words, when the economic sky clears, it may be time to buy in.

I would also be very cautious with small caps at the moment, even though many of them are being traded at even more of a discount than value stocks. After all, listed smaller companies have two major disadvantages: On the one hand, many of them are involved in cyclical industries, so a weak economy will also affect them. In addition, the smaller ones have much greater difficulty obtaining cheap loans than well-capitalized firms. A good time to buy small caps would be an imminent economic recovery and a signal that capital market interest rates will continue to fall.