Courage Despite Uncertainty

As financial advisors, we would love to tell our clients what lies ahead with inflation, interest rates, and bank closures. But the sad truth is that we do not know. Nobody knows. However, we do know one thing: we have been through worse. Remember 2020, when the whole world came to a standstill for weeks? We thought it might be an economic apocalypse like we had never experienced before. And remember 2008? Banks fell like leaves from a tree. The market was in free fall. It was brutal. And do you know who was rewarded for it? The brave ones who stayed the course and remained invested or even made new investments!

The list of catastrophes over the past 100 years could go on and on; such as the Great Depression, 25% unemployment, 19% inflation, 20% interest rates, world wars, presidential assassinations and impeachments, 9/11, the Cold War, the proliferation of nuclear weapons, etc. And do you know what? We survived.

The market still averaged 6% per year, despite some bumps along the way.

Economists warn of an upcoming recession, but the market sees it differently

As recently as last fall, a recession was predicted with high probability for this year. Then it was canceled, then postponed, and now the majority of economists are moving back to the supposedly safe statement that it is inevitable. And what are the stock markets doing? They are painting the opposite picture.

Transportation stocks, which should be a good barometer of future economic activity expectations, are holding up well. Semiconductors, which are the modern means of transport as they power activity around digital information, have made an impressive comeback in recent months. On the flip side, the three weakest sectors year-to-date are those considered most defensive: utilities, healthcare, and consumer staples.

This is not exactly what you would expect if the market were worried about what is to come. We know it is easy to find negative headlines about the state of the world. It is also incredibly easy to be negative right now. But when the stock market is so far removed from the current narrative, we must listen to the market.

The market foresees the next rate-cut cycle coming

The banking collapse has caught up with monetary policy. For this reason, monetary authorities are likely to initiate a regime change in their previously restrictive monetary policy soon. Of course, they do not want to communicate this openly. To save face and preserve confidence in their actions, they instead went ahead with the previously announced interest rate hike in March 2023. But behind the scenes, monetary policy will gradually shift towards easing, because events show that the sharpest rate-hiking cycle in decades over just a few months has pushed the financial system to the limit of what is tolerable! During the previous zero-interest-rate phase orchestrated by central banks, risk-takers bought too many and in some cases too illiquid risks, and piled on too much debt on top. As early as May 3, 2023, at the next FED meeting, there will likely be no further interest rate hike.

Although inflation has not yet been defeated, politicians and central banks will now want to shift their priorities. The rate-cut cycle will start sooner than planned, meaning inflation will remain persistently high to the detriment of citizens. The bond markets will gain more stability in the short term, though they will not become more attractive in terms of valuation. Where the yield curve is highly inverted – as with the US dollar – short-term rates in particular will fall, neutralizing the inverted yield curve over the coming months. Therefore, we see only limited potential for long-term bonds for now, while things look better for the stock markets.

We remain in a balanced position and are gradually reducing cash reserves

Fear and disorientation have always been poor advisors for an investor. Perspectives are better. You cannot afford to miss the start of the next bull market - otherwise, you miss the bulk of the returns. A gradual easing of monetary policy and the transition into the long-awaited rate-cut cycle will lead to a rise in the markets.

We must continue to focus on ignoring the noise for a while. In the end, however, we will be glad that we exercised patience and seized the opportunity to be "greedy" when others were fearful.

As always, we thank you for the trust you have placed in us and look forward to investing together in 2023!