The US government's latest trade and tariff agreements have brought temporary relief to the global equity markets. It even seems as if the tariff war has been fully digested - at least if the stock markets are taken as a yardstick. The DAX reached new highs this month and the S&P 500 and Nasdaq 100 are trading just a few percentage points below the all-time highs reached in February. The poor survey results in the USA on the current environment and the outlook for companies and private households have improved somewhat this month. By contrast, the latest US economic data, which had previously been solid, has weakened. Consumer spending has declined and demand for houses fell sharply in April. US goods imports fell by a whopping 19.8% over the month - a historic slump that can be attributed entirely to the tariff war (base effect). It remains to be seen whether these negative impulses will increase and intensify and to what extent the tariffs will affect prices, consumer behavior, the labour market and global growth. At its quarterly announcement two weeks ago, the American retail giant Walmart stated that price increases cannot be avoided for much longer. Home Depot and big-box retailer Costco, on the other hand, were more positive. Both companies are telegraphing that no price increases will be necessary this year despite tariffs. However, Home Depot is already sensing that customers are postponing larger projects into the future - an indication that the high financing costs are having a negative impact on consumer behavior and that consumption is becoming more selective. It can be assumed that the high level of interest rates in the USA will continue to weigh on private households for longer and longer. The rising yields on US government bonds (longer maturities) due to the high and potentially sharp rise in government debt are further increasing the financial pressure on households.
After an eventful and turbulent April, share prices recovered remarkably quickly and the volatility decreased significantly. After a surprisingly swift agreement was reached in the trade dispute between China and the USA, sentiment improved abruptly and the stock markets began to jump sharply. The S&P 500 Index rose by over 6% in May and the Nasdaq 100 Index by a solid 9%. Since the beginning of the year, the Nasdaq 100 is down a good 1% and the S&P 500 is also only just up at 0.5% - in CHF terms, both indices are trading well down: -8.9% (S&P 500) and -10.3% (Nasdaq 100). European equities gained on a monthly basis, with the SMI index being one of the weakest performers with a gain of 0.91% (excluding dividends). In view of the high valuations and the stagflationary trend in the US, we are maintaining our partial hedges on US equities. We see opportunities in European equities and continue to maintain a high allocation to Swiss equities.
The US government's frivolous budget and the planned tax cuts are causing yields on long US government bonds to rise significantly and weighing on the US dollar. Yields on 30-year Treasuries rose by almost half a percentage point in May and exceeded the five percent level over the course of the month. The securities are currently trading slightly below this level again. The downgrading of the USA's credit rating by Moody's was probably overdue but is no less indicative of the current state of the US fiscal budget and its deterioration in the coming years. According to the Congressional Budget Office, US net government debt will rise from 98% of GDP in 2024 to 149% of GDP in 2040 if the 2017 tax cuts are made permanent. The Republicans' planned tax cuts, which are intended to boost growth, could therefore have exactly the opposite effect, as mentioned at the beginning. The risks of stagflation in the USA are now high. In our opinion, the equity markets are not pricing in the economic drag effect of higher interest rates in the US. In view of high valuations, this harbors price risks. The bond market is reacting much more sensitively and is gradually pricing in the aforementioned risks at the very long end of the yield curve. Long maturities for US bonds (>10 years) should be avoided and gold serves as a welcome currency diversification. The oil price is likely to remain under “structural” pressure - OPEC+ decided to increase oil production last Saturday.
US economic momentum is weakening and the risk of stagflation in the US is increasing noticeably. The labor market is showing downward trends, such as fewer newly created jobs and declining wage growth. At the same time, the financial pressure on private households is increasing significantly with a low savings rate. Various indicators of financial stress have been showing unfavorable developments for some time now. In Europe, the outlook for corporate profit and sales growth is not encouraging and economic momentum in Europe generally remains rather weak. However, we consider the recent economic and fiscal policy commitments made by Germany, France and other EU countries to be positive (and long overdue). If these are implemented, growth in Europe will receive a significant boost. China, the world's second-largest economy, has to overcome a wide range of structural problems and significantly improve prospects for young people, overcome deflation, generate job and wage growth, expand social safety nets such as healthcare and pension systems and “manage” the real estate sector without friction, while opening up the economy and transforming it into a service society.
As disruptive factors and uncertainties dominate, no unnecessary risks should be taken at the moment. We are well positioned for the current environment with our investment strategy. We remain broadly diversified and hold partial hedges on equities as well as a high proportion of CHF and gold.