BIf you look back on the past two weeks on the stock exchange, the conclusion in the Dax is more than sobering: a minus of 9 percent or more than 1200 points. In the past five trading days, the leading German index has fallen by more than 4 percent. The news from Friday also shows that the market is in a correction phase: Star investor Ray Dalio’s Bridgewater hedge fund has bet at least 6.7 billion dollars on falling stock prices in Europe. This clearly smells like a bear market, i.e. further price losses.
Accompanying the sell-off in stock markets around the world is a sharp rise in bond yields, which is also the result of a sell-off. Since the beginning of June, the yield on ten-year federal bonds has risen from a good 1.0 percent to 1.9 percent. Thanks to the calming pill from the European Central Bank (ECB), which after an emergency meeting on Wednesday announced the flexible reinvestment of maturing bonds from its purchase programs that expired at the end of June, the bond markets have recovered somewhat.
The yield on the ten-year Bund was 1.65 percent on Friday. The yield on Italy’s ten-year government bonds fell even more sharply, from a good 4 to 3.6 percent. Nonetheless, investors are now turning their attention to bonds after avoiding this asset class in recent years due to negative interest rates.
With a price of 85 percent, the ten-year federal bond is now worth considering again as a safe security for many investors. Because when it is due, you get 100 percent back. In view of the long term, however, this calculation harbors many uncertainties. The fact that private investors are increasingly looking at bonds again shows how doubts on the stock markets have increased. High inflation and increasingly aggressive interest rate hikes by central banks in the United States, Great Britain and even Switzerland, together with concerns about energy supplies, are fueling expectations of a recession.
Lagarde under pressure to act
The fact that the ECB is not planning its first interest rate move until July cannot be justified as a wait-and-see approach to economic development. Because their primary task is to maintain monetary stability and thus to take decisive action against inflation. This is where ECB President Christine Lagarde comes under increasing pressure to act. This is illustrated by the inflation rate of 8.1 percent in May, which the statistics office Eurostat confirmed in a second estimate on Friday.
Even if interest rates on the bond markets have risen, investors should be aware that they are still comparatively low and, after deducting the inflation rate, are clearly negative. The current correction phase on the stock markets has been expected for a long time, especially after the turnaround in interest rates and inflation is accompanied by new geopolitical conditions due to the Russian invasion of Ukraine. The question is, what else can you invest in at the moment? Good advice is expensive here, but high-dividend stocks from stable companies are worth considering for now because they can offer attractive entry levels over the long term.
For example, James Rutherford, head of European equities at wealth manager Federated Hermes, favors companies that can be more offensive than defensive and that have strong free cash flows. This enables them to invest in research and development and to buy back their own shares. Such companies could emerge stronger from the turmoil.