Economic growth is slowing, inflation is low and the labour market remains robust. The central banks remain unchanged in their loose monetary policy until the economic data demands new steps. The quarterly reports were mostly positive and exceeded the low expectations. Stock valuations are elevated in the US and slightly above the long-term average. They are attractive in Europe and in emerging countries. The Swiss stock exchange is relatively expensive.
The sentiment on the financial markets is unsettled. Investors worry about falling inflation rates and in some cases even about an approaching recession. The bond market began to price in a rate cut at the end of the year. With the anticipated additional monetary easing, better-than-expected corporate earnings, and continuing share buybacks, stock exchanges rose steadily, causing some investors to be feared of missing out and stock positions were therefore rebuilt.
Our main scenario sees a consolidation on a high level. The high liquidity gives some support but the low growth expectations pose some resistance on the upside. We recognize an irritating disruptive factor in the record-high “short-volatility” positions. Should these shorts need to be closed with rising volatility, the stock markets would quickly come under pressure.
Two Trump tweets rekindled the trade war last Sunday. Beginning of the week, the volatility jumped by leaps and bounds. As a consequence, it can be assumed that the short-volatility traders will cover their positions and accelerate the correction temporarily. Our expectation is that market participants will relatively quickly invest the unused money at lower prices and thus avoid a major correction.
Schaan, May 6, 2019