Market commentary: trade dispute, dealing with volatility

There was a sell-off in equities on the international capital markets last week, particularly on Thursday and Friday. The pressure to sell remains high in Asia today and is once again affecting Europe, while US futures are also down significantly today. We are in the midst of the sharpest and fastest downward movement since the Covid-19 crash. Volatility, which is often referred to as the fear barometer for the stock markets, has risen from below 20% to over 50% in the last few days.

The reason for the sharp downward trend is the trade tariffs on imports from other countries announced by the Trump administration. The poor mood was also fueled by the subsequent retaliatory tariffs imposed by China.

The uncertainty is likely to persist. A quick solution is not to be expected. Volatility is likely to remain correspondingly high. Investors are currently wondering what the Trump administration’s motives are. Is it just about exerting pressure? Will the tariffs actually remain in place? Have all the planned tariffs been imposed, or will there be more to follow (e.g., in the pharmaceutical or semiconductor industries)? Or does Donald Trump intend to lead the USA into a recession? A recession would result in significantly lower interest rates, which is one of Donald Trump’s primary objectives (also in view of the US national debt, which is constantly being renewed).

We are currently expecting that tariffs will fall in the medium term. As of today, the US equity markets will have corrected by over 20% from their peak and are thus officially in a bear market. This will now massively increase the pressure on Donald Trump from both the political and business spheres. In addition, agreements are likely to be concluded with various countries and sectors. However, it is currently very unclear what the timeframe for this will be.

If the uncertainty persists, the US Federal Reserve is also likely to take action. We do not expect the Fed to cut interest rates significantly more this year than originally planned. Traditionally, it does not take stock market prices into account. However, it also aims to achieve full employment, and unemployment in the USA is currently on the rise. The Fed is faced with a dilemma between fighting inflation and supporting the economy through monetary policy. As a result, there is currently a high level of uncertainty regarding interest rate cuts. At this point in time, the market is expecting the Fed to cut interest rates five times this year, significantly more than the two cuts originally expected.

We believe that a slight recession has already been factored into equity prices. If the global economy does indeed plunge into a severe recession, this is unlikely to be fully priced into equity prices at present. In this scenario, equities will probably have a further 10-15% downside risk. As things stand today, our primary scenario is not that the economy will fall into a severe recession.

A U-turn by Donald Trump cannot be ruled out. Nevertheless, the news is likely to deteriorate again in the short term, whether as a result of retaliatory tariffs, for example by the EU, or due to a further reaction by the USA to the retaliatory tariffs imposed by China.

In view of the high level of uncertainty, it makes sense to analyze past corrections of a similar magnitude in order to establish a basis for consideration. In the 12 cases since 1945 in which the S&P500 index fell by 20% or more from its peak, the following developments occurred in the years that followed:

• 12 months after the collapse:
  positive returns in 67% of cases, average returns of 12.9%.
• 36 months after the collapse:
  positive returns in 91% of cases, average returns of 29.2%.
• 60 months after the collapse:
  positive returns in 100% of cases, average returns of 52.7%.

Empirically speaking, it is therefore clearly advisable to remain invested. History also shows that the best trading days of the year often occur right after the worst days. The markets are massively oversold and a countermovement could take place at any time. The chance of missing the re-entry after a panic sale is very high. This was most recently clearly demonstrated in the Covid-19 crash. It was just as painful to stay invested then as it is now, but staying invested was the only right thing to do. In general, it can be said that corrections such as the current ones are part and parcel of investing. The price of the “honey pot of equity returns”, averaging 6-7% a year, is the ability to weather such turbulence.

Our Investment Committee, headed by Cyrill von Burg, decided to remain invested today. A deep recession is not our baseline scenario. On the contrary, we expect the tariff situation to improve significantly, at least in the medium term. If, for example, the individual high tariffs are suspended and “only” the base tariff of 10% is introduced instead, this should “only” reduce US GDP by around 0.5%. This scenario is also likely to have only a marginal impact on inflation.

We would like to point out that our portfolios consist of sound, well-established, and market-leading companies, with a strong focus on Swiss companies and the Swiss franc. A strategy such as the “balanced” risk class 3 (max. 60% equities) consists of around 80% Swiss francs, 8% euros, and 12% dollars. US technology stocks account for no more than 8%. In recent weeks, as the tension has increased, we have been continually adjusting our positioning slightly, even within the bond ratio of 42%. The biggest risk is the approximately 35% of Swiss equities. However, we pay close attention to a strict selection of qualitatively convincing business models. In addition, we are in the middle of the dividend season, which will provide an additional cash cushion.

We will analyze, assess, and ultimately decide how to proceed on a daily basis. Our decision to remain invested may therefore change at any time.