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Created on 19.07.2019

Summer storms and changes in the weather

Beautiful summer evenings often end with a storm. Should we also expect the financial markets to cool off? Or will there be a complete change in conditions?

When everything is looking rosy and on the up, the Swiss are often sceptical – there must be something amiss, it can’t last forever. This may all sound a bit cliched, but there may be a grain of truth in it. Is it because sunny Swiss summer days and barbecues often end with a storm?

On the up across the board

Let’s leave it there with the amateur psychology. The stock exchanges have certainly been flying high in recent weeks. Whether it’s risky investments such as equities or corporate bonds or investments for uncertain times like government bonds and gold, all asset classes have made gains. Stock indices and bond prices hit record highs.

These universal price rises were probably due to falling interest rates. While economic data has been disappointing in recent years, paradoxically this increasingly failed to result in falling equity prices. Instead the markets are relying on central banks to cut interest rates to boost economic growth. The prospect of falling rates then drives prices up.

How much longer?

The central banks have rarely disappointed financial markets in recent years. Central banks worldwide indicated their willingness to cut rates again recently. The justified question is how long this can go on? Either there will be an economic downturn – which would also hit equity prices – or a downturn will be avoided, but this would then mean interest rates having to be corrected upwards.

More changeable weather

The situation does not seem sustainable. But what can we expect over the next few months? Will there be a change in conditions, in other words a recession? This would hit equities hard. Growth prospects have further deteriorated in recent weeks. Clearer signs of a recession have failed to appear yet though.

As in a Swiss summer, brief summer storms that clear the air cannot be ruled out either given the current highs on the financial markets. Storm clouds still seem some way off. But as our experience of Swiss summers tells us, storms can quickly brew up out of the blue. Individual storms are much more difficult to forecast than changes in weather conditions. It’s hard to predict exactly who will be hit by a storm. So it’s always wise to carry an umbrella.

We have positioned our portfolios to take account of this uncertainty. We are not gearing up for a change in conditions just yet, but remain prudent and aware that even the most glorious summer days come to an end.

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