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T&V Commentary | Q2 2023

The stock market is the economy and yet it is not. The development of the stock market is closely linked to the development of the economy but nevertheless they can develop in different directions for a while.

In our last quarterly report, we wrote that we wanted to gradually reduce the cash holdings despite the countless uncertainties. This has proven to be the right thing to do!

In her article "The investor's guide to bull markets" Callie Cox addresses the question of whether the current upswing on the stock markets could last or whether it is a bear market rally, as claimed by the majority of analysts. We want to go into this question in more detail in this report.

Are we in a new bull market?

A look at the past shows that bull markets arise when investors mentally leave a crisis behind. This leads to a rally that usually lasts a year or more and drives the stock markets to new highs. Today's market, however, does not exactly give that impression. If it were a true bull market - meaning that the upswing would last - it could be a sign that an important change in market psychology was underway.

Why doesn't it feel like we are in a bull market?

Because the task of the central banks is not yet done. As long as inflation is above 2% they have an excuse to continue to burden the economy with high interest rates. As long as we don't get inflation under control, a recession is not out of the question.

Moreover, it cannot be overlooked that not all stocks are rising at the same pace. Small-cap companies, which usually lead the rally at the beginning of a bull market, have lagged miles behind the big-cap companies this year. Cyclical sectors - or industries that usually do better when the economy is growing - have also lagged. The bulk of this year's gains have come from a handful of large-cap technology stocks while the rest of the S&P 500 has lagged the index.

Now comes the tricky part: bull markets rarely feel like bull markets at the beginning. Since 1950, the S&P 500 has bottomed on average three months before the end of a recession. And if you wait until things feel better, you could miss the start of the bull market.

How do I know if this is really a new bull market?

This could depend on what we see in the labour market and in corporate earnings. If consumers and companies continue to do well (hiring and employment have remained consistently high so far), then investors have a good reason to remain optimistic.

One piece of good news: the data could get even better. Analysts now believe that S&P 500 earnings could rise quarterly - a trend that has marked the end of the bear market in the past.

Of course, "better" is not synonymous with "good" and there are still signs of slowing growth. But we may be in a situation where investors are warned of the worst-case scenario while slowly warming up to the best-case scenario.

What is the probability that Wall Street is wrong and we are still in a bear market?

Momentum is on the side of investors at the moment. History shows that it is unusual for stocks to rise steadily for eight months and then suddenly fall to new lows. This has happened only once since 1950 - in the dot-com bubble.

How long can this bull market last?

If it is a bull market, then historically the rally could last a while. Since 1950, bull markets have lasted an average of 5.5 years - four times as long as bear markets over the same period. During these bull markets, the S&P 500 has gained an average of 183%.

Of course, every bull market can look drastically different. The most recent bull market, which lasted from March 2020 to December 2021, ended just before the two-year mark. Before that, we experienced an 11-year bull market as we struggled out of the global financial crisis.

Bull markets rarely follow a straight upward trajectory. Most bull markets in recent decades have seen at least one correction of 10% or more, as well as numerous headlines indicating an imminent end to the bull market. Sell-offs happen even in strong bull markets.

How do we position ourselves?

This year we see the opposite picture from last year - growth stocks are performing strongly so far, value stocks are lagging behind.

The Swiss heavyweights (Nestlé, Roche and Novartis), which account for around 45% of the Swiss Performance Index SPI, have performed relatively disappointingly so far. Roche has been in the red since the start of the year, Nestlé unchanged and Novartis slightly up.

We still believe that monetary policy will gradually move into easing. Whether the first rate cut will come this year or next year is uncertain. But we think now is the time to position yourself in the market. As already described in the Q1 2023 T&V Commentary, we have gradually reduced our cash holdings and continue to reduce them.

We remain balanced to avoid being caught on the wrong foot. We also see no clear indications as to whether value or growth should be overweighted. Therefore, we position ourselves in both areas.

Inflation has not yet been defeated but the trend is moving in the right direction!

As always, we would like to thank you for the trust you have placed in us and wish you a pleasant and relaxing summer!

T&V Commentary Q2 2023
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