The pivotal point on the stock exchanges is monetary policy and the development of interest rates. A calming of the rise in interest rates is in sight – but is that enough for a price recovery on the stock market?
“Interest is the price of money,” says Niklas Helmreich, Germany head of asset manager Trive. This formula is as old as the theory that a currency is like a country’s stock. But you can twist and turn it however you want in 2022 – the stock market depends on interest rates, especially on ten-year US interest rates. The major international stock indices are waiting for a signal from Fed Chair Jerome Powell that the rate hike phase may finally be coming to an end. At the beginning of November there was more of a disappointment in this regard. Logically, the former favorites from the US technology sector were hit particularly hard. The Nasdaq lost more than 30 percent in 2022, as it depends first and foremost on interest rates.
The reason for this is inflation, which has now reached double-digit annual rates and has risen to the highest level since the 1980s. Elliott Management, one of the world’s best-known and most successful hedge funds, blames central bank policymakers for the situation. They were “dishonest” about the reason for the high inflation. According to Elliott, the disruption to supply chains caused by the corona crisis instead of the overly loose monetary policy during the pandemic is responsible for this. In other words, monetary policy was too expansionary. The reputation of the central banks has been badly damaged.
How bad will it get?
The cracks in the global financial system are already becoming increasingly apparent. The near-crash on the British bond market due to the difficulties of pension funds could only just be avoided. To counter concerns about liquidity shortages, the US Treasury Department is already working on plans for a bond buyback program. “There is no doubt that more turbulence in the $23 trillion US bond market would also have a major impact on global finance,” said Ricardo Evangelista, senior analyst at Activtrades.
German banks and savings banks benefit from the ECB’s tight monetary policy, but rarely pass on the higher interest rates to their private customers. Where savers can still find good fixed and overnight interest rates
And now economic problems are emerging. Well-known online platforms are already reporting the first declines in rents in major US cities. At the same time, the economic slowdown is having a dampening effect on inflation, as shown by the historically close correlation between yields and the ISM Purchasing Managers’ Index. For several months, however, the economic barometer has been plummeting, while interest rates are rising. “This divergence is a clear warning signal to the economy, especially since inflation expectations are also falling sharply,” says Niklas Helmreich. “On average over the next five years, the market only expects inflation to be around two percent in the Fed’s target zone,” he adds.
No green light
After the very sharp monetary policy braking maneuvers, an expansive monetary policy with falling key interest rates could support the markets again in 2023. But investors shouldn’t get too excited. Despite the recent rebound in stock prices, defensive stocks continue to outperform cyclical stocks. This means that the latter rise more sharply when the economy sends positive signals again, which is not the case at the moment and they are therefore lagging behind. The traffic light on the stock exchange is therefore orange, with predominantly defensive stocks such as high-dividend stocks being in demand.
And the optimists among the stock market traders cannot rely on seasonality either: the traditional Christmas rally generally did not take place when stock market returns were negative in the first ten months of the year – as was the case this year. It is therefore advisable to continue to exercise caution, for example with ETFs (Exchange Traded Funds) on global high-dividend stocks such as the paper with the ISIN IE00BYV1YH46 from Fidelity. An alternative are securities that offer a buffer against falling prices and still allow double-digit returns, such as discount and bonus certificates. In Germany, the providers DZ Bank and UBS are particularly strong in this segment, offering a wide range of stocks from MDax, SDax or TecDax right up to the second league.