Investors’ Outlook: When the Fed sneezes…

The incubation period between central banks’ rate hikes and the first symptoms appearing in the real economy has come and gone.

This month showed rates can’t be increased without something breaking. The first wave of problems in crypto markets rippled over into venture capital before spilling over into the first real collapse in regulated markets and the banking sector. Contagion fears spread and a crisis of confidence broke out. The situation was so fragile that it didn’t take more than two simple words by Credit Suisse’s top shareholder ruling out further investments to help trigger a loss of confidence – and seal its fate.

Given the media headlines that appeared as quickly as they disappeared, googling for financial health check information led some investors to worry if their chills were indicative of a potential 2008 global financial crisis relapse.

What medicine did we employ? Preventative measures were already in place. Cutting risk in our portfolios, going neutral on equities, and staying underweight on high-yield bonds proved to be the perfect move to protect our clients’ assets ahead of the turmoil March ushered in.

So what’s the prognosis for the global economy? Central banks are now between a rock and a hard place; having to choose between financial stability and price stability is a bitter pill to swallow. They’re likely to favor price stability, though the cocktail of a slowing economy and weakening inflation rates makes a recession more probable – and with that, rate cuts.

Given the heightened volatility in the markets, we believe it is too early to lean out the window and pick up perceived opportunities, as the situation could still take a turn for the worse.

In this Investors’ Outlook, you will find our take on the most recent developments in the markets and economy. We take a closer look at the US labor market, where we’re starting to see the first cracks appear, and weigh the damage that’s been done in the banking sector and whether we’re in for a repeat of 2008. You can also read up on the details of our asset allocations and why we have decided to refrain from any changes.  

Our focus topic this month delves into US stocks and how our colleagues in the Quality Growth Boutique help clients find opportunities in the country’s equities landscape – which is of particular importance in the current market environment.

While we will let the dust settle before making a move again, we are keeping a close eye for signs of convalescence.

Bless you and Gesundheit.