After a sharp correction, the equity markets quickly regained their footing in August. Many investors are nonetheless wondering whether the positive trend can really be trusted. Philipp Dobbert, Chief Economist at Quirin Privatbank and quirion, puts the developments into context.
Up until July, we saw many all-time highs on the equity markets. Even after a brief weak phase, prices quickly climbed again. A sign of stability?
The long-term trend on the equity markets has so far always pointed upwards. That's because equities give you a stake in companies, and the economy as a whole is geared towards growth. On the markets, though, you always have to reckon with setbacks in between. As we experienced once again in July and August. Weak phases are entirely normal and needn't worry long-term-oriented investors. That said, the recent correction was once again an example of how some reckless speculation doesn't pay off – and how that can then weigh on entire markets.
In what way?
One reason for the brief, sharp slide in prices on many equity markets worldwide was probably the unwinding of so-called carry trades, a highly speculative business. At its core, it is about interest-rate differentials. In Japan, interest rates stayed close to zero for a particularly long time. Some investors therefore borrowed money there and put it into higher-yielding US bonds. At some point the bet then spilled over onto the equity markets as well. Some took on debt in yen and invested the borrowed money in large US tech stocks, for example.
When the Japanese central bank then raised its key interest rate somewhat – more or less unexpectedly – and signalled further rate steps, this put carry traders in a tight spot. They had to unwind at least part of their positions and sell securities. On top of that, the yen rose against the US dollar. This weighed on the Japanese equity market. But the storm quickly subsided again.
Could something like this happen again?
No one knows exactly how many carry trades were built up over the past eight to ten years. I can well imagine that at some point renewed pressure on prices will come from this quarter. For the US markets, though, other factors are currently even more important. The interest-rate decision on 18 September, for instance. And, of course, how the economy develops. Speculation about a looming economic slowdown also played a role in the recent correction.
That speculation arose after it emerged that the US unemployment rate had risen in July – albeit only slightly …
It's true, labour-market data alone don't say much about the US economy as a whole. I think most people in the market are aware of that too. That said: the US economy has so far proved extraordinarily robust despite high key interest rates. It borders on a miracle how positively the first half of the year turned out. Honestly, as an economist I sometimes have to rub my eyes. But because many have long been expecting a recession, they take even small changes as a sign that it's about to begin.
What are you expecting for the US economy?
Pushing back inflation with sharp interest-rate hikes without triggering a recession: that would be a historic event in the Fed's history. It's possible things will turn out that way. But I don't think it's particularly likely. That said, this tells us nothing about how prices will move. Sharper price reactions are to be expected when something surprising happens – whether positive or negative.
On top of the nervousness surrounding interest-rate decisions and economic developments, there are the presidential elections in the US: is a “hot stock-market autumn” ahead of us in the world's largest equity market?
Around presidential elections, volatility on the US markets is usually somewhat higher. But whether it's economic data, interest-rate decisions or companies' quarterly figures and outlooks: sharper price swings generally only occur when something unexpected happens. How “hot” it all gets is something no one can know in advance. As a matter of principle, it is not advisable to let forecasts guide your investment strategy.
And what investment strategy can I use to prepare for the uncertainty?
With a well-diversified global portfolio. That way you don't have to worry about short-term price movements. And you shouldn't, either: time and again it has been shown that investors lose money when they try to catch supposedly optimal entry and exit points.
If you don't yet have such a portfolio, you should give it some thought. Our global ETF portfolio is diversified according to scientific criteria. This lets you take advantage of the long-term return opportunities of the capital markets without exposing yourself to unnecessary risks.
