Has the peak now been passed?

Market experts are hoping that the period of rate hikes will come to an end early next year. But the environment for investors could remain uncomfortable even in this scenario.

The situation on the stock exchanges is confusing: Even weeks of price gains, as they have been taking place since October, can turn out to be bear market rallies in retrospect.

Brendan McDermid / Reuters

Sometimes a slight deviation from the inflation forecast or a concise statement from a central banker is enough for the mood on the global stock and bond markets to change.

This week provided another example: the governor of the St. Louis branch of the US Federal Reserve Board sparked an immediate correction in the leading US stock market indexes by saying that monetary tightening so far had only had a “limited effect” on inflation out. James Bullard had taken the position that the key interest rate might have to rise from today’s 4 to as much as 7 percent in order to curb inflation.

A week earlier, the opposite scenario had played out: A core inflation rate that was 0.2 percentage points lower than expected caused euphoria on the American stock markets and resulted in the largest daily gains in two and a half years. The prices of interest-sensitive technology and growth stocks like those of Amazon increased in the double-digit percentage range.

Although financial market theory repeatedly speaks of rational and efficient markets, in the current environment one has to say: As an investor, one should not read too much into such short-term market movements. Even week-long streaks of gains, like those seen since October, can later turn out to be bear market rallies.

Will the US Federal Reserve brake for the first time?

At the moment, however, there is something like cautious optimism among market experts when it comes to inflation. According to Bloomberg, a majority of economists in consensus expect that the US central bank will slow down its monetary tightening course for the first time on December 14th. Instead of a key interest rate increase of 0.75 percentage points as in the last increase step, this time it should only be 0.5 percentage points.

Belvédère Asset Management chief investment officer Thomas Heller is also optimistic that US inflation may have peaked.

In addition, Heller can even imagine that the Fed will achieve what is known as a soft landing: curbing inflation without triggering a major recession as a result of the higher interest rate level. “Many experts say it is almost impossible to contain inflation with a so-called soft landing. That would indeed be very extraordinary. But currently, the data I’m seeing supports that scenario.” Both the American labor market and consumer trends indicated at best the potential for a slight recession.

In Europe, the easing of energy prices also suggests that the peak may soon be reached after inflation in the euro zone hit a new record high of 10.6 percent in October.

In their market analyses, the heads of investment at the big banks Credit Suisse (CS) and UBS also express the hope that inflation has peaked in several economies. “The recent fall in inflation in the USA, but also in Switzerland and Brazil has confirmed our expectations,” writes Burkhard Varnholt, Head of Investments at CS Switzerland.

According to Varnholt, arguments in favor of the turning point scenario are the consumption-dampening influence of higher prices, but also the slowing effect of inflation: if higher interest rates make new debt more expensive, economic demand falls and prices fall.

Finally, the statistical base effect also plays into the hands of the central banks. This is because the central banks always use a one-year time frame when assessing inflation rates. “Statistically, the first price increases are not observed.”

In his baseline scenario for monetary policy, Mark Haefele, Chief Strategist for Global Wealth Management at UBS, also assumes that the Fed, the European Central Bank and the Swiss National Bank will complete their interest rate hike cycles in the first or “at the latest in the second quarter of 2023”. In the United States, he even considers the first interest rate cuts to be possible again towards the end of 2023.

At the same time, however, he and his team point out that this does not necessarily have to lead to an immediate trend reversal in the price development of stocks and bonds. The reason for this is the cooling economy in many countries: “The impending economic weakness has not yet been fully priced in.” The risk/reward ratio in the next three to six months is still unfavorable. Haefele assumes that the stock markets will be around the current level in the middle of next year.

Which stocks are doing well in the bear market?

Of course, even in a bear market, there are securities that fare better than others despite, or perhaps because of, high inflation. In the United States, it is primarily energy stocks that top the list of best-performing stocks since the beginning of the year. They benefit from the geopolitical environment and from the sometimes extremely sharp rise in oil and gas prices.

In the Swiss leading index SMI, on the other hand, it is primarily company-specific factors that have influenced the price development of the individual stocks, says Heller, head of investment at Belvédère. Zurich Insurance, the major bank UBS, the building materials group Holcim, the pharmaceutical group Novartis and Swisscom lead the annual ranking in the SMI. But although the telecom company is one of the winners, its share price is down 3.5 percent compared to the beginning of the year. This shows that stock markets still have a long way to go.

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