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11.11.2024
Hangover in Europe – Euphoria in USA
The contrast could not be greater. In the same week, the government in Germany plunged into chaos while in the USA the Trump victory realigns the country to an uncompromising strategy for economic success. And this is only on top of major divergences in the respective economies. Germany is in a recession and its industry seems to head into a free fall. A misguided policy has eroded all competitive advantages in recent years – as in many places in Europe. This is exemplified by the automotive industry. Massive pressure to focus on an unrealistic energy transition and unsustainably high, union-protected wage levels are digging the grave for one of the key industries in good old Europe. The US has its weak points as well, of course. The 38%-wage increase at Boeing pushed through by the trade unions regardless of the dismal situation of the company is one example. But overall, the economy in the US is in a much better shape than the European one and much better than perceived by the voters who gave economic pains as one of the main reasons for their wish for a change. The economy grew by a healthy 2.8% in the third quarter, unemployment is at a very low level, and inflation – one of the other pains felt by the voters – fell from a top of 9.1% in 2022 to a tame level of 2.5%.
The sweeping victory of Donald Trump and the Republicans is really almost unmatched. If and when they even win the majority in the House this will mean a one-way road and Trump can push through his “America first” policy on a fast highway. Starting from an already solid economic set-up this will lead to a massive growth stimulus. Deregulation, tax cuts, a strict mucking out of the bureaucratic stable, a hard prune back of a woke culture that deviates the country from real problems, the reduction of extreme climate actions that will not save the world, but which are very burdensome for the economy, etc., etc. will start a “golden age” as Trump calls it. And he is serious about this and has already started to implement it even before he is in office as the nomination of the “iron maid” Susan Wiles as White House chief of staff demonstrates.
The US is really on the move now and the euphoric mood which will spread across the country will further spill over to Wall Street and might ignite a forceful year-end rally. The Fed is seconding this move by having started the rate cut process two months ago and by taking further steps like last Thursday. It has also to be remembered that even without such a rocket-like push the 60 post-election trading days in the last 35 years have always shown a positive stock market performance in the range of 5% to 15% (with the exceptions of the internet bubble burst and the financial crisis).
Not all the measures taken by the new administration and the new congress will be positive for the economy in every respect, however. Especially two aspects have the potential to disturb the party in the medium term. One is the even more massive increase of the national debt as it would have been the case with a blue government. There are clear warning signals from the bond market. Since mid-September when the polls started to move in favor of Trump the yield of the 10y treasury bond has risen by 75 bp to 4.35%. Another one are the tariffs on imports which could amount to 60% e.g. on Chinese products. This could reignite inflation but above all, it could temper growth, and it might have a meaningful negative impact on specific companies and on the economy as such. Tesla e.g. sells 600’000 cars p.a. in China and 75% of the rare earths needed to manufacture e.g. semiconductors in the US stem from China. This is the other side of the coin. It remains to be seen how much of this will materialize in the future. For now, the positive mood will prevail.
(this text was not written by ChatGPT)
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07.10.2024
Snake charming
Recently there was a lot of noise about a potentially looming recession. The state of the economy was the topic of the day, especially in the US where the Fed lowered rates with a jumbo cut. Economic resilience and growth are important for the financial markets but the development of inflation is equally important. Remember in this context e.g. the disinflation decade in the eighties of the last century which was accompanied by one of the most powerful bull markets ever seen. And with regard to inflation, there was, at first glance, a lot of good news in the last two weeks.
The inflation rate in the Eurozone fell to 1.8% in September, its lowest level in just over three years. In Germany it fell to 1.6% from 1.9% in August, in Switzerland, inflation even dropped below 1%. And in the US the annual inflation rate slowed for a fifth consecutive month to 2.5% in August (September figures will be released on Thursday), the lowest since February 2021. Even in Turkey, the inflation figure fell below 50%. It seems that the central banks are gradually getting to grips with the situation after they failed to intervene decisively in 2021 and – figuratively speaking – let the inflation snake out of its basket. Inflation exploded, driven by a tremendous catch-up move in consumption after the COVID-lockdown, massive supply chain disruptions, and an ultra-accommodative monetary policy. Remember that inflation in the Eurozone stood at 10.6% in October 2022 and in the US at 9.1%. Central banks were behind the curve with their countermeasures. “Too little, too late” as we then commented: the fed funds rate was at a record low of 0.25% until March 2022.
Since the central banks’ U-turn in their key interest rates in 2022 they tried to appease inflation like a snake charmer who subtly hypnotizes the snake and tries to get it to move completely back into the basket. Everything looks quite good now – but could they really close Pandora’s box?
We think it is still too early to make a final judgement. For several reasons. First, the official inflation figures have come down mainly because of declining energy prices. The price of Brent crude oil e.g. fell from USD 120 per barrel in June 2022 to USD 72 in mid-September of this year. Since then, it jumped again to USD 78 due to the explosive situation in the Middle East. Excluding the volatile prices for energy and food, inflation in the Eurozone is still between two and a half and three percent – which is not surprising given the sharp rise in wages. The price of services alone e.g. once again rose at an above-average rate of 4.0%. In the US core consumer prices rose by 3.2% in August, still way above the Fed target of 2%. Secondly, inflation still hurts, mostly those who can least afford it, and climbing wage costs are jeopardizing price stabilization. It is somehow like an expert said: “Inflation is coming down but prices are not.” A good example in this respect is Switzerland. The official inflation rate is 0.8%. Many people, however, are seriously suffering from high prices and they are e.g. barely able to pay health insurance premiums, which doubled in the last 20 years. A “disinflation mood” has not yet reached ordinary people and it is not surprising that there are cries for pay rises. The recently announced pay rise of more than 60% for dock workers on the east coast in the US is a striking example but even in good old and modest Switzerland the unions aggressively demand a general salary increase of 5%.
Inflation is not yet definitively defeated, and the cobra is still dancing in front of the snake charmer, ready to bite him at any time. But the fear of the cobra should not paralyze us. As long as interest rates are so low and continue to fall, there are few alternatives to a well-diversified equity portfolio with quality stocks.
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23.09.2024
One hurdle cleared, the next one in sight
Last Wednesday, the Fed lowered its key interest rate by 50 basis points. The interest turn-around was widely expected, and the market has longed for it with increasing impatience. The market reaction on Thursday was clearly positive: The Dow Jones Industrial Average hit 42,000 for the first time in its history, the S&P 500 scored another record close, and the Nasdaq was fueled by a tech rally. The size of the rate cut gives, however, food for thought. This might be one of the reasons why the upward trend soon ran out of steam again. Historically the market moved up in the months after the first rate cut. But the markets crashed when the Fed implemented its first cut with 50 basis points or more. In 2001, the S&P 500 fell about 39% to its trough in October 2002 and in 2007 it plunged roughly 54% in the succeeding seven months. Of course, these market reactions were caused by very special events: the internet bubble burst and the financial crisis’s black swan. In both cases, the economy suffered a massive recession. But the Fed jumbo rate cut, which a few even see as a panic reaction, is anyway somewhat disturbing. Falling interest rates are balm for the markets but the boon may be short-lived if the rate cut was orchestrated to stave off a looming recession. The stock markets face now a difficult balancing act between interest rate cut fantasies, sustainably falling inflation, and worries about economic development.
Be it as it may, the markets took this hurdle, i.e. the interest rate cut uncertainty and the somewhat ambiguous interpretation of the size of it, but only to face a new one: the upcoming elections in the US. The election date is only about six weeks away and the elections will increasingly dominate the discussions in the markets. The outcome of the election will be very close, and it will be decided in the seven swing states. Trump or Harris is thereby only one question, the other one being whether the Senate and/or the House of Representatives will be red or blue. An additional uncertainty lies in the only vaguely comprehensible programs of the two candidates. The broad outlines may be clear. If the Republicans win across the board, this would e.g. mean further tax cuts for companies and private individuals as well as deregulation of the energy industry. This will most probably be positive for the stock market. If the Democrats were to win the White House and Congress, companies in the US would have to adjust to higher taxes: Kamala Harris wants to increase the profit tax rate from 21 to 28 percent. A Democratic government would probably also apply more regulations that are harmful to the economy like a stricter antitrust law. In this respect, many analysts see a complete victory for the Democrats as the worst-case scenario for the stock market in the short term.
But these uncertainties should not be overestimated. Political stock markets have short legs as history shows and in most cases, the stock market has a positive performance in the months following elections. Moreover, the old saying: “stock markets climb a wall of worry” could apply here, especially if the downward path of interest and inflation rates persists and a recession can be avoided. Short-term political uncertainties which, as the past shows, could temporarily turn into turbulences might, however, temper the market mood a bit and lead to a higher risk premium in the stock market.
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09.09.2024
Stock market roller coaster
The major stock markets had more or less recovered seemingly unscathed from the mini-crash at the beginning of August and some of them – e.g. the most important S&P 500 index – reached new record highs, only to start September with another cold shower again. The US market which has been predominantly driven by an AI-hype and the so-called “magnificent seven” stocks is losing this driver somewhat as investors want to see now concrete results at the bottom line of the companies that made huge investments into the supposedly game-changing revolution. This took out some heat out of the markets, which certainly is a healthy development as e.g. at the time before the earnings announcement of Nvidia the fate of the global stock markets seemed to depend on a single figure. The reported figures for the second quarter were then outstanding and even have beaten the estimates. Nvidia reported an earnings increase of 168% from a year ago. The market did, however, not honor this and the stock dropped 6% at this time. In the sell-off of tech stocks last Tuesday it even lost 10% and ended the week with a minus of 14%. From exuberance to disenchantment.
As the “magnificent seven” and related stocks lose steam and the AI-hype is giving way, at least temporarily, to a “wait-and-see” attitude, the classical pillars of any stock market in a longer-term view, i.e. interest rates and earnings, will predominantly determine the development. And in this respect, it doesn’t actually look too bad. Interest rates in the G-7 countries are sinking and this Wednesday even the Fed will follow the other central banks and lower the feds fund rate. This is, of course, basically positive for the economy and the stock market. It will, however, not ignite a new rally as the move is broadly expected. It even could cause a further correction in the sense of “buy the hope and sell the facts” which we quite often see in shaky markets. But ignoring short-term noise, one thing is a given: lower interest rates (this time also supported by falling inflation) are a positive for the key pillar of a stock market: its valuation.
On the other hand, earnings might be a little less dynamic as in the recent past and the share of positive surprises will most certainly decline. Not dramatic but, of course, a real recession would change the picture. That’s why recession fears keep depressing the stock markets – and even the fundamentally cheap segments – as it was the case at the beginning of August and again last week. We, however, do not see a global recession on the horizon and point out that e.g. in the US only 30% of the economists are seeing a danger in this respect. They might be wrong but based on the economic data which we follow closely we think that recession fears are clearly exaggerated. Labor market data as e.g. the somewhat disappointing non-farm payrolls reported last Friday shouldn’t be overemphasized. They are only one part of a whole puzzle, moreover volatile and often restated.
On balance, the current status is actually a positive for stock markets – as the main drivers of them are – and have always been – lower interest rates and therefore a rise of the valuation. Even geopolitical uncertainties and e.g. the upcoming US elections do not dramatically change this picture.
But short-term psychology will drive markets, and the ups and downs will continue for some time. This requires strong nerves, like on a rollercoaster ride, patience, risk tolerance, and risk capacity. We are somewhat cautious and have taken some profits lately. But we don’t see the highly volatile phase as a warning sign for the beginning of a new bear market and are ready to increase our stock market exposure again if the stock markets take another massive dive.
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19.08.2024
Is central bank independency sacrosanct?
The US presidential elections are moving into the final round. The strategic thrusts of Donald Trump and Kamala Harris and the Republicans or Democrats respectively are at least known in principle. It is, however, at least premature to base investment decisions on this. On the one hand, the outcome of the election is once again rather uncertain, and, on the other, history shows that even major political upheavals usually have no lasting impact on the performance of the stock markets as a whole.
One point on which Trump and Harris differ significantly and which could have a meaningful impact on the monetary framework of the US economy is their view on the independence of the Fed. Two weeks ago, Republican nominee Donald Trump said that a president should have “at least say” about the Fed’s policy. VP candidate JD Vance added: “The political leadership of this country should have more say over the monetary policy. That fundamentally should be a political decision.” Democratic presidential nominee Kamala Harris responded that she couldn’t disagree more strongly: “The Fed is an independent entity, and as president, I would never interfere in the decisions that the Fed makes.”
Let’s share a few thoughts on the topic here. Firstly, it must be recognized that a central bank has several duties, like e.g. bank supervision and regulation, securing an efficient payment system, prevention of panics in the financial system, and ultimately the role of a lender of last resort. In the actual context we refer to their key tasks which in the US are stipulated in the Fed’s so called “dual mandate”: achieve maximum employment and keep prices stable by controlling the money supply, and raising or lowering interest rates.
Puristic monetarists will, of course, argue that no intervention whatsoever in monetary policy by politics and governments is acceptable. Otherwise, central banks could not fulfill their task. This is basically true, but in reality, it should be looked at a bit differentiated. When Trump wants to have “a say” this is, of course, also campaign rhetoric, and bear in mind that he as a president had “a say” as he nominated the Fed chairman Jerome Powell. But Trump is also somewhat right. Running an economy to stability and prosperity requires a mix of measures, like structural frameworks, tax incentives, fiscal and monetary policy. Fiscal policy, debt management, and central bank policy are, however, not really independent, they influence each other. And something else has to be mentioned here as well: central banks don’t have a crystal ball either. Remember the mistake of the Fed in combatting high inflation in the last two years (it ran up to 9.1%), which we here commented as “too little, too late” or the current discussion about high fed fund rates that might cause a recession. Seen from this angle, Trump’s remarks have a certain justification.
But in case of doubt, it is certainly better that central banks have full autonomy. Mismanaged monetary policies caused by political pressures can be found everywhere nowadays and in history. One recent prominent example is President Erdogan’s “low rates, low inflation” strategy which he pushed through until the abrupt U-turn in June last year. The central bank has increased the key policy rate since then to currently 50% to combat inflation which is still running at a level of 60%.
Central banks should be independent, but they should cooperate with the governments. And vice versa. In the US this is a glaring deficiency in the current government: Powell said recently that Biden hasn’t met with him in two years.
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05.08.2024
Happy Birthday Switzerland!
Last Thursday Switzerland celebrated its National Day, its 733rd birthday as its nucleus is the creation of an alliance of several cantons in 1291. The modern Switzerland then was created as a federal state through the constitution of 1848. We as a Swiss wealth manager send our cordial congrats and are proud of the achievements of the Alpine Republic. Switzerland is bashed frequently, probably also out of envy of its success. Predominantly by the US e.g. through extraterritorial enforcements of its view of good governance – while at the same time disregarding at home the standards they impose on others. The AEOI Act (Automatic Exchange of Information) is one example. Moreover, Switzerland suffers even from blackmailing e.g. by the EU, which demands to adhere to their laws and regulations or otherwise being barred from their markets. There are also self-destructive movements within the country itself, especially from left-wing and green circles. An expression of this was e.g. the official inscription on the Swiss pavilion at the 1992 World Expo in Seville: “La Suisse n’existe pas.”
But Switzerland does exist – and it has even been enormously successful to date. A tiny state with a population of only 9 million and no natural resources is at the top of many international rankings. Below is a selection of its positions and those of a few other countries:
- No. 1 on the WIPO global innovation index (USA 3, Germany 8, France 11, China 12);
- No. 2 on the Heritage Index of Economic Freedom (Singapore 1, USA 25, Germany 18, France 62, China 151);
- No. 2 in the IMD World Competitiveness Ranking (Singapore 1, USA 12, Germany 24, France 31, China 14); and
- No. 1 in the INSEAD Global Talent Competitiveness Index (USA 3, Germany 14, France 19, China 40).
By the way, the ETH Zurich is ranked No. 7 in the QS World University Rankings. The best University in the EU, which kicked Switzerland out of its research and innovation funding program “Horizon Europe” as a punishment for keeping its sovereignty, is ranked No. 28.
All this is not only an academic ranking survey, but it shows the foundation of Switzerland’s success and the elements that made it one of the wealthiest countries in the world. These top positions are, however, not a given. They are constantly endangered by many different threats. One of them is a too harsh implementation of climate change policies which stifle the economy. Switzerland which accounts for only 0.3% of the global CO2 output should avoid an overreaction by taking measures which above all the big CO2 producers should implement. An example of how not-to-do-it is Germany. According to a recent survey, 37% of industrial companies are considering reducing production at their site or moving abroad due to the misled energy transition.
Another trend that strangles the economy and especially SME’s is excessive bureaucracy and regulation. This can especially be seen in the EU, where thousands of bureaucrats regulate almost everything from data protection, where they oblige every bird protection association to have its own data protection policy, to the new “tethered cap” requirement for PET bottles which makes drinking from a bottle an unpleasant experience. And when you have to accept cookies every time you search the Internet: send thanks to Brussels.
The CEO of EMS-Chemie recently described the dangers accurately. According to the entrepreneur, Europe is increasingly lacking competitiveness. This is not only due to energy, which has become far too expensive. New regulations such as the European Supply Chain Act are also poison for the industry. And the lack of commitment to work is also not helping to raise productivity to a higher level.
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22.07.2024
Why not a bit of Bitcoin?
Our loyal readers will be wondering if they haven’t seen this title before. They are right – the House View of February 19th of this year, in which we gave the reasons for our positive view on the Bitcoin (limited supply, halving, new ETFs, etc.), was titled like this. At that time, Bitcoin was trading at USD 50’000. After a volatile uptrend since then it now quotes at USD 67’000. We do not mention this here to boast about the accuracy of our assessment. It is, of course, nice to have been proven right but we are revisiting the Bitcoin case here and are even taking the liberty of using the original title again because we are convinced that our arguments are still valid and that new factors driving the price potentially much higher have been added.
The recent development in the US presidential election is a very important one. The odds overwhelmingly favour now Donald Trump. The major elements of the “Trumponomics” are in a nutshell: extended tax cuts, protectionist trade policies, and looser regulation for topics like climate change including a much more positive attitude towards the domestic oil and gas industry and cryptocurrencies. The latter point is relevant in this context. Trump used to be a crypto critic. In a deliberate tactical contrast to the Democrats, who damned Bitcoin until recently, as a consequence of successful lobbying by the crypto industry, and increasingly also out of conviction, he now supports a crypto-friendly regulation. At a fundraiser event in San Francisco in June, he even pitched himself as “crypto president”.
Resilience and inherent strength. Wall Street posted a bad performance last week, as a rotation out of technology stocks shook the market. For the week, the Nasdaq100 was down 4.3% and the S&P off 1.9%. Normally in such market phases that mirror a risk-off attitude, Bitcoin itself – seen as one of the riskier bets – would dive as well. Last week, however, it rose 12%. This shows the increasingly independent character of Bitcoin as an asset class that correlates less and less with traditional financial investments. The inherent strength of Bitcoin was also seen in June/beginning of July. In January, the German authorities seized 50’000 Bitcoin in criminal proceedings relating to “movie2k”.
The Free State of Saxony then carried out a sort of emergency sale between June 19 and July 12, with a volume of around 2.6 billion euros. The price of Bitcoin staggered a bit but soon recovered and continued its uptrend. Another indication of the strength and autonomy of Bitcoin came last week when a buggy update from CrowdStrike temporarily paralyzed many IT systems. Bitcoin was not affected, and its price even rose. Crypto specialists noted that blockchains’ decentralized nature allowed to continue running despite widespread outages across the global economy.
Accepted asset class. Bitcoin is nowadays accepted as an asset class of its own and at the latest since the SEC approval of Bitcoin ETFs in January, it will increasingly be allocated in international portfolios.
The weight of this asset class is, however, still minuscule if compared to the one of single stocks: The total value of all Bitcoins outstanding today amounts to USD 1.4 trillion. The market cap of e.g. Nvidia alone to 3.0 trillion.
We hold a small position of Bitcoin in our portfolios and are convinced that this will pay off. There may be large fluctuations in the short term, however. One needs the nerve and the risk tolerance to be able to bear this.
We wish you a wonderful summer vacation!
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08.07.2024
Halftime
In these football-dominated times, “halftime” for many people will refer to the break in a game when the coach in a last-ditch effort tries to push his team to a motivation they, looking at their rich remuneration, should have anyway. Here, of course, we are discussing the stock market performance in the first half of the year.
This was an exceptionally good one. The MSCI World Index in USD advanced 11.1%. The best performance showed the NASDAQ-100 with + 17.7%. It started its steep rise last November, mainly driven by the all-dominating AI topic and the “magnificent seven” stocks. The broad S&P500 index won 14.8%, partly also supported by these stocks which due to their amazing market cap have a high weight here, whereas the price weighted Dow Jones index crept up by a meager 3.9%.
Europe was finally able to keep up more or less as well. The Euro Stoxx 50 recorded a plus of 9% and even last year’s laggard, the Swiss SMI, has now gained 8%. Asia’s performance was mixed but mostly weak. The China Shanghai composite e.g. was flat. One of the worst performers was the Brazilian Bovespa: – 7.1%. We weren’t invested in the latter two but otherwise well diversified with a heavyweight in the US. Due to the fact that we got the market trend quite well (see e.g. House View on May 13th, when we critically questioned the “sell in May” maxim or on June 9th titled “Summer Rally”) we were almost fully invested in 1H 24 and could earn a very satisfactory performance for our clients.
All well and good – but that’s history and the performance must be reworked daily. It is our view that the stock markets will continue to rise in the upcoming months. We see several reasons for a positive outlook, some of them were already the drivers in the first half. The most important one being that interest rates have reached their peaks. Many central banks have already lowered rates and the big elephant in the room, the Fed, will follow suit sooner or later. The earnings, the fundamental pillar of the markets, were surprisingly good almost across the board as we have outlined lately. Due to the quite solid economies and the business models that have been streamlined during the pandemic and thereafter, profit margins are further expanding. The earnings reporting season for the second quarter in the US which will start at the end of this week will once again show this.
In addition to the expected positive impact of interest rates and earnings on the stock markets, other factors also give cause for optimism. One of them is the US election year. Except for 2000 (the burst of the internet bubble) and 2008 (financial crisis) the US stock market did well in election years. As a statistic going back to 1928 shows, July and August were on average the best months in election years.
Positive support for the markets is also seen in the continuing sizable share repurchases of many companies and last but not least in the subdued sentiment. Many market participants do not trust the stock market boom to new highs and continue to stand on the sidelines. It takes, however, strength to swim against the tide and to be proven wrong constantly. If the positive trend continues, they will be forced into the market at some point.
One indication in this direction is JPMorgan, which has now parted company with its chief strategist. He was unwaveringly optimistic for much of 2022, when the S&P 500 Index fell 19% then he turned pessimistic just as the market bottomed missing totally the positive performance since then.
We don’t have a crystal ball or even pretend to always be right – but viewing all aspects we are quite confident that it will pay off to stay in the markets for the time being.
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21.06.2024
Witches’ Sabbath
Today is a triple witching day which as the term shows is often associated with a very extraordinary, mystic, and not clearly comprehensible event like the Witches’ Sabbath, a gathering of witches and devils for the celebration of rites and orgies. Even though stock markets are quite often irrational, driven by emotions, and sometimes exuberant, the triple witching day has nothing to do with witchcraft or devilry but is simply a coincidence of expirations on a single day.
It’s the triple witching day, when stock options, market index options, and market index futures expire simultaneously – like today. Triple witching happens four times a year (or once a quarter) on the third Fridays of March, June, September, and December. This year the dates are or were: March 15, June 21, September 20, and December 20. Until September 2020 there have been even quadruple witching days as single stock futures which started on November 2002 but ceased trading at this date were also always expiring on the last Friday in any quarter. Even without this quadruple feature, the witching days create enormous volumes in the market specifically in the last trading hour, the triple witching hour. Today we estimate that options tied to around USD 5.5 trillion in stocks and indices are due to expire and must be rolled over. In addition to that the triple witching days are also the dates of portfolio rebalancings. Mutual and index funds often rebalance their portfolio at the end of the quarter, i.e. on the triple witching days. This can induce buying or selling huge quantities of stocks and derivatives to realign their portfolios with their investment strategies.
What is the relevance of triple witching days for the investor? Clearly, with a longer-term view, there is none. Triple witching is neither inherently bullish nor bearish. But it can, of course, lead to increased market volatility due to the simultaneous expiration of future contracts options. This is a playing field for traders who are very close to the market, and which can react within milliseconds. For those who are not that close a straddle strategy, i.e. holding both a put and a call option with the same strike price and expiration date could be an option to eventually profit from large price swings in either direction. But even such a strategy is far from systematically creating profits.
Studies over different periods show somewhat counterintuitively that neither the volatility in the overall market nor in the vast majority of stocks exceeds the normal range on triple witching days. The reason for this is arbitrage. This is nowadays done by high-frequency trading systems which will erase even the smallest price gaps between futures/options and underlyings in no time.