Return of Geopolitics

The stock markets got off to a bad start in the new year. The S&P 500 fell 11.8% in the first 48 trading days of 2022, the fourth-worst start to a year in stock market history. European stock markets lost even more, falling by over -20%. The outbreak of the Russia-Ukraine conflict, skyrocketing commodity prices, sharply rising inflation rates, and sometimes mixed company outlooks weighed on stock prices worldwide. This ongoing flood of negative news brought the markets to a virtual standstill. Following the Fed meeting and continued strong labor market figures in the US in early March, a significant recovery took place, driven by purchases from investors who viewed the setback as an opportunity.

The first interest rate hike in the US is a reality

Following another record-high inflation rate of 7.9% in the US, the central bank announced the end of its zero-interest-rate policy. At the Fed meeting on March 16, 2022, the Federal Reserve decided to raise its short-term benchmark interest rate by a quarter of a percentage point. This brings the new range for the benchmark rate to 0.25% to 0.5%. It was the first time since the end of 2018 that the Fed raised interest rates, ending an easing cycle that began in July 2019 and ended with the pandemic-induced rate cut in March 2020 to almost 0% in order to support the struggling global economy. US policymakers will implement further interest rate hikes this year. The consensus among analysts for the short-term benchmark interest rate range at the end of this year is 2.5-2.75%.

Is a recession just around the corner?

"Fighting inflation" may sound abstract, but put simply, prices in the economy rise when demand is too high and supply is too tight. The central bank cannot influence the supply side, so it must curb demand: when people have to spend more money on interest payments, less is left for consumption. However, if interest rates are raised too sharply, there is a risk that this will stifle economic growth and provoke a recession.

When the facts change, we change our minds. Like the Federal Reserve, we had hoped that inflation would gradually begin to decline on its own starting in March due to high base effects. Unfortunately, very few, including us, had anticipated the invasion of Ukraine on February 24, 2022. Since the outbreak of the war and the surge in commodity prices, however, inflationary pressure will now intensify further. This could force the US central bank to raise interest rates more aggressively than previously assumed and potentially "choke off" the economy.

Our positioning

Financial markets hope that the Fed will succeed in dampening inflationary pressure without provoking a recession. In the past, however, this has usually not worked. Since we believe there is a realistic chance that this rate hike cycle will end in a recession, we have positioned our portfolios more defensively. We have divested from the majority of still unprofitable companies and will allocate some of the proceeds to more defensive companies. We also want to keep our cash levels higher for a longer period of time. High-quality stocks (high profit margins and little to no debt) should offer protection against stagflation, as they can pass on higher purchasing costs to their customers in the form of price increases.

As always, we thank you for the trust you have placed in us!