Stock market outlook 08/2024: Turbulence in the middle of the vacation season

August 7, 2024

What has been the focus in recent weeks

As explained in our last market commentary, we had to expect headwinds to emerge on the markets. This was particularly due to the risk that the US Federal Reserve would act too late in the wake of a cooling economy and cut interest rates too late. Unfortunately, this has now been confirmed. The Fed has failed to cut interest rates.

However, the fact that the movements on the markets have been so violent in recent days could not have been expected. What has happened? The interest rate hike in Japan is likely to have been a major reason for this. So-called “carry trades” had to be unwound – and this could well continue for a few more days. In a carry trade, investors borrow Japanese yen at extremely low interest rates and then invest in assets with a higher yield and in a different currency, such as US equities. In the wake of the Japanese central bank’s decision, interest rates in the yen have now risen and the yen has appreciated. Investors now had to liquidate their carry trades and sell shares. This led to a veritable sell-off on the stock markets and massive turbulence in the middle of the vacation season with lower trading volumes, which further intensified the movements. And as is always the case with major market turmoil, the psychology of market participants also plays a major role, exacerbating such movements.
The story is somewhat reminiscent of the major crisis in the Hungarian housing market during the financial crisis. At the time, many Hungarian households financed their house purchases with loans in Swiss francs at very low interest rates. When the Swiss franc rose in the course of the financial crisis, the debt burden of Hungarian borrowers in their local currency also increased. Many loans could no longer be repaid and the properties could be bought by liquid buyers at low prices.

Our investment solutions and positioning

Our multi-asset strategies made a solid start to the second half of 2024, with all asset classes making a positive contribution in July. However, the pressure on the equity markets in recent days led to setbacks. However, as we are currently heavily exposed to the Swiss market in our equity investments and are keeping our foreign currency exposure low, we were able to cushion the decline compared to other investment strategies. In addition, the asset classes of bonds, real estate and commodities have made slight gains even in recent days. These elements of diversification have therefore paid off once again.

In the stock market correction, it is clear to see that the previous winners are the clear losers in this correction. However, this behavior is nothing out of the ordinary and does not change the long-term, overarching trends. Nevertheless, in such a phase, a rule-based trend strategy, such as our Global Equity Trends equity strategy, can lead to increased adjustments, which was also the case recently. However, as soon as stable medium-term trends emerge again, these are recognized and the portfolio is realigned accordingly.

By international standards, the Swiss equity market has so far weathered the current correction relatively well. This stability is also reflected in our Swiss Equity Selection equity strategy equity strategy. Roche has even made a positive contribution since the beginning of July. Our investments in Siegfried, Geberit and Galderma are also positive. The shares of all three suffered only marginal setbacks and thus made a significant contribution to stability. UBS, ABB and the luxury goods manufacturer Richemont, which includes the Cartier, IWC and Montblanc brands, came under greater pressure.

In the past few weeks, our Global Equity Selection equity strategy some stocks have come under heavy pressure. Edwards Lifesciences, for example, disappointed investors when it presented its quarterly results, which was punished with an immediate price slide. Other companies such as Amazon or Alphabet (Google) were not hit quite as hard, but they also briefly lost favor with investors despite generally good results. Nvidia’s share price slide also appears severe at first glance. However, considering the dynamic development that Nvidia has shown in recent months and even years, this movement can be classified as a normal correction. We are convinced that fast-growing quality companies will continue to offer attractive return opportunities in the long term. Turbulence such as that experienced in recent weeks should therefore not unsettle investors.

What next? And what needs to be considered?

The current market turbulence is naturally making investors nervous. In such phases, it is important to keep a cool head and stick to your chosen long-term strategy. This is the most important success factor when investing. Even a basket of shares as conservative as the Swiss Market Index (SMI), which is dominated by the defensive stocks Nestlé, Roche and Novartis, has lost almost 7 % in a short space of time. This corresponds to more than the return of an entire year. We think this is exaggerated.

The increased volatility on the markets will most likely continue in the coming weeks. The Fed has now made its move and is likely to start cutting interest rates in September. Depending on the US economic data published in the coming weeks, several and larger interest rate cuts could well follow. Of course, there is still a risk that the Fed will come too late, but the US economy is still in fundamentally good shape, at least for the time being, albeit with signs of a slowdown. In the past, US interest rate cuts were usually followed by positive stock market developments if the economy did not slide into recession.

Another area to watch out for is developments in artificial intelligence (AI): Will the massive investments in AI, particularly by big tech companies, pay off? The picture so far is mixed. The great opportunities of AI are still intact, but on the one hand investors’ expectations are still high and on the other hand it is still unclear in many areas how exactly the investments can actually be monetized. After all, investors have lowered their expectations in connection with the publication of the tech giants’ annual results, which is basically a healthy development. Overall, however, it is particularly important to note that corporate profit margins are still intact and, for example, the profits of the largest 500 US companies are likely to increase by more than 10% compared to the previous year.
We continue to expect a positive investment year in 2024. Quality equities, gold and the Swiss franc are our preferred investments.

Point Capital Group
10. July 2024