Many investors are reminded of the bursting of the dot-com bubble in 2000 or the financial crisis of 2008 due to the high losses in the technology sector. Right?
Anyone who had hoped for a quick and violent countermovement after the biggest daily loss in the American S&P 500 index since 2020 (minus 4 percent) was disappointed. The global stock markets were unable to make up for the losses of the previous days on Thursday and in some cases slipped even further into the red. Prices continued to fluctuate wildly on a mix of fears of war, recession and inflation. The fear of even greater losses dominated.
Why American Stocks Have Fallen More
The leading American indices have lost ground particularly sharply since the beginning of the year. After benefiting from seemingly unrestrained tech stock prices over the past two years, the S&P 500 index has been hovering near the bear market for a week. By definition, this begins when the index has lost 20 percent of its high for the year. Losses on the Western European trading centers have also been in the double-digit percentage range since the beginning of the year.
Many investors are reminded of the bursting of the dot-com bubble in 2000 or the financial crisis of 2008 due to the high losses in the technology sector – individual titles have lost more than 50 percent of their market value. However, this assessment is misguided, says finance professor Heinz Zimmermann from the University of Basel.
According to Zimmermann, the current price development for tech shares is not a crash, but a valuation correction that reflects the lower profit expectations. Since many stock markets have grown in the double-digit percentage range in the past two years, a correction is a completely normal process from this point of view. Zimmermann warns against describing technology stocks as “cheap”. «It is not the absolute price of the shares that counts, but the relationship between the share price and profits. This has remained amazingly constant, especially with growth titles.”
At the same time, Zimmermann admits that the current situation is unique in its complexity, which explains the partially undifferentiated behavior of the capital markets. Inflation, supply shortages, higher energy prices as a result of the Ukraine war and the corona pandemic made an appropriate response difficult. He assesses the behavior of the US Federal Reserve, which he believes to be reliable, as positive. Market data also indicated that inflation would return to more tolerable levels over the next five years.
With the strong franc, Switzerland has an advantage in fighting inflation
Manuel Ammann, finance professor at the University of St. Gallen, also explains the strong price corrections with the fact that share prices react very sensitively to interest rate increases when market interest rates are very low. According to Ammann, this effect is particularly strong for growth stocks, the majority of whose profit potential lies in the future. In addition, investors are currently more risk-averse and therefore demand a higher risk premium when buying shares.
Ammann also emphasizes that it was to be expected that the inflation potential that had accumulated over 14 years with an expansive monetary policy would eventually be released, with the well-known consequences for the economy and the financial markets. It is still unclear to what extent the central banks would have to take countermeasures.
On the other hand, it is clear that the assessment that the rise in inflation as a result of the pandemic was only temporary was probably wrong. “It was probably politically induced wishful thinking.” However, the central banks’ scope for raising interest rates is limited due to the high national debt.
Due to the strong franc, Switzerland is still in the comfortable position of being less affected by the inflation trend: the high purchasing power has a dampening effect on the prices of goods imported.
According to Ammann, the strengthening of the dollar exchange rate in recent weeks as a result of the Fed’s more restrictive monetary policy has also shown that this can change at any time and could theoretically even lead to the unusual situation in which the Swiss National Bank is revaluing the franc to combat inflation envisages. “With its very large balance sheet, it would have enough ammunition for such an approach,” says Ammann.
Monetary policy limits reached?
Marc Chesney, Professor of Quantitative Finance at the University of Zurich (UZH), believes that the central banks’ accommodative monetary policies have reached their limits. “Central banks are currently no longer able to push stock prices up any further,” says Chesney, who is considered a critic of the global financial industry.
He considers the current situation to be proof that traditional risk-return models in financial economics do not adequately capture the complexities of the real economy. “The focus on historical data does not sufficiently take into account surprises such as the war in Ukraine or developments in the wake of global warming.” In order to be able to record future developments earlier and more precisely, Chesney advocates an interdisciplinary approach to financial economics with other branches of science.
Credit Suisse warns against panic
Meanwhile, Credit Suisse Global Chief Investment Officer Michael Strobaek stressed that now is not the time to exit the stock market: While investors are concerned about the sharp ups and downs, they should not panic during a market down and you Liquidate portfolio. “As long as the risk of a recession remains under control, as we believe, there is still positive potential for returns in the financial markets.”