Stock market outlook – October 2022

October 6, 2022

“A special cocktail”

The most important ingredient in this cocktail is interest rates. Practically everything on the markets depends on them. Anyone who can predict interest rates knows the future prices of the various asset classes…

What moves the markets

Rising inflation in the double-digit percentage range in many places around the world continues to keep the markets on tenterhooks. The central banks reacted too late to inflation and now have to act with a correspondingly heavy hand. This is accompanied by increasing recessionary tendencies. In other words, central bankers must try to contain inflation with a restrictive monetary policy while at the same time not taking the economy’s breath away. It is a fine line. In Europe, the fear of an energy crisis is also causing uncertainty. Now, just before winter, higher energy prices are also fueling inflation. Fears of a recession have increased in recent weeks. At the same time, however, the rise in inflation has slowed worldwide, which is the “good news”. Freight rates for container ships, for example, have actually been falling sharply for some time now. The latest ISM Purchasing Managers’ Index figures for US industry also indicated a cooling of the economy, suggesting that the Fed’s aggressive interest rate hikes are having an effect. In September, the overall index fell to its lowest level since May 2020. The markets are naturally also keeping an eye on the economic superpower China. The zero-tolerance policy in the area of coronavirus and developments in the real estate sector are clearly having a negative impact there. It is therefore a very special cocktail that is currently being served to the markets.

How did the markets react?

The global financial markets have suffered from strong downward pressure in recent weeks. The downward trend on the stock markets even accelerated significantly. Losses were heavy worldwide and many indices fell below their lows for the year. Even conservative strategies offered no protection against losses. Looking back over a longer period, the price performance of equities and bonds, for example, largely diverged. This has not been the case since the beginning of 2022 – at least so far. The last few weeks have also been characterized by high volatility in practically all asset classes.

What next?

The good thing is that everything looks so bad… What sounds contradictory makes perfect sense: the current news and expectations for the future are generally reflected to a large extent in market prices. However, we must be prepared for a continued increase in volatility. The markets can move quickly in one direction or the other. This happened, for example, in a positive sense from mid-June to mid-August, when many market segments in the equity sector advanced by 20 percent or more in a short space of time. The central banks will do everything they can to get inflation under control but – despite all the strong rhetoric – they will not be able to do so without taking losses into account. We have already seen this to some extent in England and Australia. The Bank of England intervened to support the market in the short term when there was a risk to the liquidity of pension funds in connection with turmoil on the bond market. In Australia, the central bank recently did not raise interest rates as much as expected out of consideration for economic developments. The moment will come when a European central bank or the US Federal Reserve will at least make a rate adjustment. This is what the markets are currently waiting for. After the US congressional elections at the beginning of November (mid-term elections), for example, the wind could change. The focus will then be on the presidential elections for 2024. Historically, the US stock markets have risen sharply on average after the mid-term elections. Softer tones from Fed Chairman Powell could already bring about a turnaround. Meanwhile, there are also more and more reasons to believe that we have reached or are close to a peak in interest rate expectations. The coming weeks will also be particularly exciting in China: the 20th Congress of the Communist Party is coming up and decisions could well be made in this context that will have a positive impact on the Chinese economy and therefore also on stock markets worldwide. A course correction in dealing with coronavirus and monetary or fiscal policy measures are very possible. Let’s not forget: China – the world’s second-largest economy – is practically the last country to be in a kind of lockdown. An easing of the lockdown has enormous economic potential.

As far as shares as an asset class are concerned, long-term investors must be aware that even individual shares of genuine quality companies have now corrected by up to 50 % in some cases. It is well known that the best foundation for investment success is laid in times of crisis. Investors have a natural reflex to want to get out of shares when the clouds in the stock market sky are at their darkest. However, stock market setbacks offer the greatest opportunities on the financial markets.

How we position ourselves

Defensive positioning with a focus on “quality” is still fundamentally advisable. But with the necessary flexibility to adjust as soon as the interest rate situation changes. Active portfolio management is particularly important in this context. 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. On the equity side, our tactical part remains defensive: The consumer goods, utilities and healthcare sectors are strongly represented. These stocks also have good opportunities in a tense market environment. In terms of currencies, we continue to focus on the US dollar and the Swiss franc.

Point Capital Group
6. october 2022