Whether asset managers, analysts, strategists or private investors, for many stock market players the summer holidays are coming at just the right moment this year. It's time to take a breather and not have to think about inflation, rising interest rates and geopolitics for a few days. These three issues dominated the first half of 2022 and put the brakes on the years of upward travel on the stock markets. The equity asset class is now in an “official” bear market. The same is true of the broadly diversified MSCI World Index. Containing more than 1500 companies, on 12 May the benchmark was standing more than a fifth below the all-time high reached just at the start of the year. That makes it the very definition of a bear market. In Switzerland and on Wall Street, the SMI and S&P 500 respectively fell below this threshold in June.
A little later, the different stock exchanges bid farewell to the first half with figures deep in the red (see graph). The wheels fell off technology shares in particular. The Nasdaq 100, a veritable who’s who of the US IT industry, gave up almost 30% from January to June 2022, demonstrating that the braking factors of the last few months are having a particularly strong impact on the technology sector. These include the more difficult financing conditions resulting from rises in yields and concerns about consumers’ declining willingness to spend money due to high inflation, to say nothing of the continuing shortage of components and general logistics problems. The war in Ukraine combined with the recent coronavirus lockdowns exacerbated these problems still further.
Inflation, the turnaround in interest rates, geopolitics – these three factors are set to continue worrying investors even after the holidays, the first two of these especially having a symbiotic relationship. At the turn of the year many experts were still assuming that the surge in prices would abate. They were soon taught a lesson, though. In Europe inflation picked up again in June, the consumer price index for the eurozone exceeding the figure for the same month the previous year by a record 8.6%, after 8.1% in May. In Switzerland, the Swiss Federal Office for Statistics (BfS) reported that the country’s consumer prices had risen 3.4% year-on-year in June. The latest consumer price index (CPI) for the USA was published on 13 July (after this publication went to press). According to Reuters, economists had on average anticipated that consumer prices in America would have climbed 8.7% relative to June 2021. By comparison, in May the inflation rate was 8.6%.
Against this background, it is not surprising that central banks are pulling heavily on the reins. The current turnaround in interest rates is being clearly expressed in bond yields. The 10-year US Treasury is delivering 3.06% at present, some 156 basis points more than at the end of 2021. At the moment yields on Swiss and German government bonds have dynamically left negative territory. Even Japan has recently started having to pay significant interest on its 10-year debt instruments again (see graph 2). Central banks face a real herculean challenge over the months to come. On the one hand, they have to push back the spectre of inflation. At the same time, they need to turn the interest-rate screw in a way that is as gentle as possible on the economy. Fed boss Jerome Powell recently made it clear that the USA would not under any circumstances be allowed to slide into a “higher inflation regime”. To achieve this goal, the central bank would even be prepared to increase interest rates to an extent that threatened growth.
Corporate profits play a key role for the stock market alongside monetary policy and geopolitics. Analysts on Wall Street especially reckon that profits will continue to rise sharply. Total profits for the S&P 500 in 2022 are expected to be a good tenth above the figure for the previous year. This consensus is now being put on the test bench as companies publish their quarterly results. The earnings season should offer plenty of insight into how groups are coming to terms with the current environment and how they see their business prospects. All things considered, then, stock markets are at the proverbial crossroads. If inflation continues to climb and the profit outlook also clouds over, the bears could hold sway in the second half of the year as well. It may perhaps be no bad thing, therefore, to protect portfolios or take a short position here and there. That should also make it easier to switch off in the holidays.
Source: Reuters; as at: 30.06.2022 Past performance is not a reliable indicator of future performance.
Source: Reuters; as at: 11.07.2022 Past performance is not a reliable indicator of future performance.