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World equity markets end November with biggest monthly rally in three years. Optimism for 2024 challenged by declining liquidity and inflation.

The world equity markets wrapped up November with their most significant monthly rally in three years, sparking optimism among investors. However, the main challenge for investors in 2024 will be to substantiate these hopes as trends. The first obstacle is the belief that inflation will miraculously decrease without any significant impact on growth and the disregard for monetary aggregates.

Inflation is on the decline due to the significant drop in money growth, leading to a sudden decrease in liquidity, a weakened economy, and worsening financial conditions. Data compiled by the Institute of International Monetary Research shows that broad money (M3) growth is down 0.9% in the United States and -1.0% in the euro area, indicating a substantial liquidity drain. The United States will need to refinance $7 trillion of maturities in a declining broad money economy, creating a massive vacuum effect.

Market participants cannot rely on the Federal Reserve to implement significant rate cuts or a quantitative easing program in the midst of an election year. Even if the Fed were to cut rates, the impact is likely to be minimal compared to the seven- to ten-trillion-dollar liquidity drain required by the U.S. and other major governments in 2024.

Trusting in multiple expansions is concerning, as markets would need to depend on rising liquidity, not a reduction, to achieve them. The S&P 500 trades at a price-to-earnings ratio of 18.8 times, driven by Tech Megacaps, while Europe appears cheap due to differences in composition. However, Europe's largest components are mature, low-growth stocks, leading to a valuation that may be steep for utilities, banks, and mature industries.

In a scenario of liquidity drain, investors need to focus on fundamentals and select stocks that will maintain margins and growth in a weak economy, rather than relying on multiple expansion. Market optimism is based on the notion that unprecedented liquidity drains and declines in monetary aggregates will have no impact on earnings, margins, access to capital, or economic growth.

The only bullish argument often repeated is that central banks will act quickly if markets and economic figures deteriorate. While this may be the case, it is unlikely to happen as swiftly or in the size required to offset the monetary aggregate slump. Therefore, investors must remain cautious and focus on companies with strong fundamentals in the face of declining liquidity and economic uncertainty.