Stock market outlook – December 2022

December 6, 2022

“Higher for Longer”

What moves the markets

The last few weeks have been dominated by the expected easing of central bank policy. This has taken place against the backdrop of a decline in momentum on the inflation front. The markets were correspondingly positive.
Several pieces of economic data also point to a slowdown in the US economy. The much-noticed ISM Purchasing Managers’ Index for the manufacturing sector in the US even fell below the 50 mark for the first time since May 2020 with a value of 49. A value below 50 indicates a decline in economic activity. In the current environment, weak economic data is being traded positively on the stock market because people are betting on declining inflationary pressure, which in turn points to lower interest rates. There are also signs of easing inflation in Europe, despite the energy crisis that is weighing on Europe.

Meanwhile, we are hearing remarkable things from China. The world’s second-largest economy and the most populous country in the world seems to be moving away from its zero-covid policy.
All eyes are on the central banks these days. How do they interpret this data and how long will they stick to a restrictive policy with interest rate hikes? It’s a fine balancing act for central bankers: getting inflation under control without choking off the economy at the same time. Added to this is the fact that we are experiencing a cycle that is unique in many respects, characterized by the effects of a pandemic and unprecedented monetary and fiscal policy measures, and that the effects of the central banks’ measures only become apparent much later. However, the measures are only one thing. The communication and rhetoric of the central bankers is the other. The markets literally hang on their lips and react immediately.

How did the markets react?

The slight easing in inflation has triggered price gains on the stock markets in recent weeks. Most asset classes have developed positively. A veritable price firework followed on the stock markets at the end of November, when the Chairman of the US Federal Reserve spoke for the first time about the possibility of fewer interest rate hikes. The US dollar weakened accordingly against most currencies. On the equity side, stocks in the commodities, IT and utilities sectors performed very well. Quality stocks – shares of companies with very solid balance sheets and earnings – also posted above-average gains.

What next?

There is much to suggest that the issue of inflation is likely to occupy us for some time to come and that a scenario of “higher for longer” could be on the cards on the interest rate side. It is a “sticky” issue… In the services sector in particular, which is heavily dependent on wage trends, there are few signs of slowing inflationary momentum. A look at the US labor market, for example, shows that it is still running hot: The unemployment rate remains very low despite slowing economic momentum and at the same time many new jobs are still being created. Wages are continuing to rise accordingly. Structural changes in the wake of the experiences with the disrupted supply chains in many places also tend to have an inflationary effect.

The energy crisis in Europe persists and winter has not even really started yet. This is also not having a supportive effect on lower inflation. However, we expect inflation to continue to lose momentum and the central banks to become more cautious with further increases in key interest rates. The Fed will announce the next interest rate adjustment in mid-December. After four interest rate hikes this year of 0.75 % each, we expect a further increase in US key interest rates of just 0.5 %, which is the general consensus and is likely to be priced into share prices. In addition to the rate hike, the focus will be on communication: How does the Fed envisage the further course of interest rates, how will the various indicators be interpreted? The European Central Bank (ECB) and the Swiss National Bank (SNB) will also announce their interest rate adjustments in mid-December. The development of corporate earnings will be interesting and will determine the further course of the stock markets. Will analysts have to revise their profit estimates downwards? So far, many companies have been able to pass on the higher costs through corresponding price increases and thus compensate for them. In the wake of higher financing costs, companies with high levels of debt in particular could come under additional pressure.

How we position ourselves

In the current environment, a cautious investment policy remains appropriate. We are therefore sticking to our fundamental orientation and prefer defensive sectors. In the tactical part of our equity investments, we are exposed to sectors such as healthcare, consumer goods and value stocks in general. Gold as a real asset is a cornerstone of our multi-asset strategies, with a certain degree of inflation protection and protection against a further escalation in the Ukraine conflict. As far as currencies are concerned, we are focusing on the Swiss franc and the US dollar. The so-called “greenback” also serves to a certain extent as a hedge in the event of a negative market trend.

Point Capital Group
6. December 2022