Will recession follow inflation?
Macroeconomic update for the month of September 2022
Until recently, the big issue occupying market participants was inflation—and how central banks were reacting to it. Since the end of the summer holidays, however, we have noticed a change: Now it is economic growth that is causing concern.
We consider the August stock market gains to have been a bear market rally and are continuing to monitor the markets closely. For the time being, we are keeping our portfolio orientation unchanged.
In our monthly CIO update, we analyzed the current market environment and discussed the factors in its background. Presenters were Mario Montagnani, Senior Equity Strategist, and Michaela Huber, Investment Strategist
We are leaving our orientation unchanged
The big question concerning the market right now is: Where are we in the economic cycle? Yield curves have traditionally been a good indicator for determining the answer to this question. In the US, many yield curves have recently inverted, leading us to conclude that we are at the end of the cycle. Because of this, over the coming months we expect that important leading indicators such as the ISM Survey and Purchasing Managers' Indices will decline.
A comparison with the 1970s makes sense, as that was also a period when inflation was high. Back then, stock markets rebounded as soon as inflation peaked.
Speaking of rebounding, share prices have recently been staging a recovery. But we are “only” regarding this is a bear market rally—one which has become particularly apparent in the USA. Investors had been assuming that the Federal Reserve would start to hike less aggressively, but those hopes were dashed by Fed Chairman Jerome Powell's remarks at the Jackson Hole Symposium.
While it appears that inflation has peaked and the Fed is no longer tightening policy as aggressively as it was in the first half of 2022, other indicators seem less positive to us. We were confirmed in this view over the past few days, as the rally noticeably lost steam. All these factors, as well as the still uncertain geopolitical situation, mean that there is still a risk of recession.
We are maintaining our neutral stance on all major asset classes. When it comes to equities, we prefer non-cyclical markets like the US and Switzerland. In the case of bonds, the peaking of inflation rates and the turnaround in interest rates both argue in favor of a longer duration. At the same time, weaker growth and stricter lending activities are making people more cautious. Our current preference is for government bonds. In alternative investments, we are sticking to our overweight position in gold as a hedge.
