Courage Despite Uncertainty
T&V Letter Q1 2023
The start of 2023 was characterized by inflation, rising interest rates, banking sector stress, and recession fears. At the same time, the market was already showing the first signs of renewed confidence. Particularly in phases like this, it is crucial to tune out the noise, remain searchingly invested, and seize opportunities step-by-step.
Insight
When uncertainty dominates, patience, perspective, and a step-by-step approach are often more valuable than quick reactions.
The stock market is the only market where buyers run away when prices are low.
2023 is not 2020 and not 2008
Economists warn of an upcoming recession, the market sees it differently
The market sees the next rate cut cycle coming
We remain in a balanced position and are gradually reducing cash holdings
NEWSLETTER
2023 is not 2020 and not 2008
As financial advisors, we would love to tell our clients what is going to happen next with inflation, interest rates, and bank closures. The truth, however, is unfortunately that we do not know. Nobody knows. But one thing we do know: we have been through worse. Remember the year 2020, when the whole world stood still for weeks? We thought it might be an economic apocalypse like we had never experienced before. And remember 2008? Banks were falling 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 in the last 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 it.
The market continued to average 6% per year, despite some bumps along the way.
Economists warn of an upcoming recession, the market sees it differently
Just last autumn, a recession was predicted with high probability for this year. Then it was called off, 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 expectations of economic activity, are holding up well. Semiconductors, which are modern transportation as they power activity around digital information, have made an impressive comeback in recent months. On the other hand, the three weakest sectors since the turn of the year are those considered the most defensive: utilities, healthcare and consumer staples.
That's not exactly what you would expect if the market were worried about what's to come. We know that negative headlines about the state of the world are easy to find. It is also incredibly easy to be negative right now. But when the stock market is so far removed from the current narrative, we have to listen to the market.
The market sees the next rate cut cycle coming
The banking collapse has caught up with monetary policy. As a result, monetary authorities are likely to soon initiate a regime change in the previously restrictive monetary policy. Of course, they do not want to communicate this as such. To save face and maintain confidence in their actions, they instead carried out the interest rate hike in March 2023 that had already been announced beforehand. But secretly, monetary policy will gradually transition into easing because events show that the sharpest interest rate hike cycle of recent decades within just a few months has pushed the financial system to the limit of what is tolerable! During the previous orchestrated zero-interest-rate phase by the central banks, risk actors bought too many and, in some cases, too little liquid risks and, on top of that, took on too much debt. Already at the next FED meeting on May 3, 2023, there will likely be no further interest rate hike.
Although inflation is not yet defeated, political leaders and central banks will now want to change priorities. The rate cut cycle will start sooner than planned, and thus inflation will remain persistently high to the detriment of citizens. The bond markets will gain more stability in the short term, even if they do not become more attractive in terms of assessment. Where the yield curve is highly inverted - as with the US Dollar - short-term interest rates in particular will fall, resolving the inverted yield curve over the coming months. We therefore currently see only limited potential for long-term bonds, whereas the outlook is better for the stock markets.
We remain neutrally positioned and are gradually reducing cash holdings of cash
Fear and disorientation have always been bad advisors for an investor. Perspectives are better. The start of the next stock market rally must not be missed - because otherwise, you miss the majority of the returns. A gradual easing of monetary policy and the transition into the long-awaited interest rate cut cycle will lead to a rise in the markets.
We still need 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 placed in us and we look forward to investing together in 2023!
*This communication is for informational purposes only and does not constitute a personal recommendation or an independent financial analysis.
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